I’m delighted to join you today to talk about this Government’s radical plans to set up a Green Investment Bank.
The global shift to a low carbon economy will require profound transformations - in the way we power our factories, light our homes, run our cars. But this is not just an environmental necessity; it is also a tremendous economic opportunity.
Over the coming decades, energy, transport and waste infrastructure will all have to be revolutionised or even rebuilt in order to decarbonise our economies.
That explains why there is a huge, growing market for low carbon and environmental goods and services. This market was worth £3.2 trillion globally in 2008/09, and could grow to be worth £4.3 trillion by 2015.
The economic imperative
If, as a nation, we grasp these opportunities early on we can secure the long-term benefits of new investment and green jobs. It is a launch-pad to reshape and reinvigorate the British economy for the future.
We have in the UK the world’s sixth largest green sector. We have the largest single market for offshore wind in the world. And we are Europe’s leading producer of electric vehicles.
So we are already right up there with our leading international competitors. As a Government, we are determined to help British companies surge ahead of the pack.
But we cannot take anything for granted. In 2009, China - a voracious consumer of energy - ploughed $34bn into low carbon. It now has the highest installed hydro capacity in the world; the most solar water heaters; and six of the biggest renewable energy companies.
If we want to stay in the race and beat our competitors we need to be investing in our low carbon capabilities right now. Developing the cutting-edge technologies, products and services that we will need here in Britain - and that will be in demand around the world.
As they take shape they will create substantial supply chains, giving many companies - including many small firms - the chance to find their place within them. These emerging business opportunities are a gateway to new markets overseas and a springboard for long-term, sustainable economic growth.
That is why the Government is stepping in - creating the world’s first bank dedicated to catalysing the investment that is needed to support green innovation.
Low carbon policy framework
But we understand that business is not willing to invest the substantial resources required in this area unless it is absolutely clear that low carbon is more than just a passing fad.
So we are providing that certainty: establishing clear policy frameworks that allow the private sector to take long-term commercial decisions. Providing the consistency that creates an attractive environment for investment which, by its very nature, will yield dividends only over a period of many years.
We are committed by law to a 50% reduction in carbon emissions by 2025. We have launched the world’s first incentive scheme for renewable heat, which should increase investment in green heat technologies by £7.5bn by 2020.
We have launched the Green Deal, under which householders, businesses and landlords will be able to improve the energy efficiency of their homes and buildings at no up-front cost.
We have also introduced a carbon price floor; proposals on electricity market reform; and a range of initiatives to encourage the roll-out of green vehicles.
The message is going out loud and clear that we are serious about being the greenest Government ever. But, however noble this intention, the lack of available finance will stymie progress if it is not addressed.
Green Investment Bank activities
So the Green Investment Bank underpins our ambitious plans to decarbonise the economy and enable UK businesses to compete and win globally.
Over the past year we have conducted detailed research and analysis, which has established that a number of market failures are constraining private sector investment in low carbon. The bank is designed to tackle these barriers.
Its overarching objective will to catalyse private investment and initially it will concentrate on higher risk projects, which are unlikely to proceed without support.
Critically, the bank will be an enduring institution, independent of Government. We will agree its long-term strategic objectives but stay out of its day-to-day activities. And it will have a clear commercial remit - meeting environmental objectives while delivering financial returns.
Analysis suggests the bank could offer a range of products to rectify the market failures that have been indentified.
These might include:
- risk mitigation products - taking on first loss debt to encourage other private investors;
- innovative finance mechanisms - such as upfront refinancing commitments that guarantee the bank’s ultimate withdrawal, upon conditions being met;
- and capital provision - taking equity and providing senior debt on market terms, to generate additional capital.
Naturally, this is not an exhaustive list. The bank will take shape over a period of time, in response to its strategic priorities and the needs of the markets.
Equally, we do not want to be prescriptive in terms of the sectors it will invest in. But early candidates may include offshore wind; waste and industrial energy efficiency.
The advisory group we are setting up, which will be chaired by Sir Adrian Montague and comprised of a group of independent finance experts, will be invaluable in helping the bank respond to these emerging priorities.
Green Investment Bank finance
Now of course, to be successful, the Green Investment Bank must have adequate resources at its disposal if it is to unlock the mainstream private sector finance that low carbon needs.
This is the reason the Chancellor committed funds worth £3bn to the bank over the course of this Parliament, despite having to make some very tough choices on public spending due to our dreadful economic inheritance.
These funds will be invested with and through the private sector, and our analysis suggests they may generate up to £15bn of private investment by 2015 - a sum large enough to bring about the profound transformations that the shift to low carbon will demand.
The bank will need to comply with state aid rules, so our proposals will have to be approved by the European Commission before we can formally establish it. But we cannot afford to sit on our hands until they grind their way through the Brussels sausage factory.
The time to act is now and so, in order to make rapid progress, from April 2012 my Department will start to make direct, state-aid compliant investments in green infrastructure projects.
Once approval has been granted, the bank will be formally constituted along the lines that I have outlined.
We expect that from April 2015, as public sector net debt reduces as a percentage of GDP to a more sustainable level, the bank will assume borrowing powers.
This careful approach - balancing responsible husbandry of the public finances with the bank’s need to achieve critical mass - will allow it to step up its operations as the need for investment in low carbon grows.
And that is our core priority - building on the UK’s reputation as a world leader in this area, and enabling British businesses to grasp the immense opportunities that are opening up as the move to low carbon gathers pace.
The Green Investment Bank is an ambitious undertaking - but a vital one.
To get ahead of our competitors, we need to build on our strengths; focus on innovation; and develop new products and frontier technologies.
The bank will offer critical support to our companies, as they do just that - generating new jobs and deliver the green growth that will yield tremendous economic and environmental benefits to the UK.