Sophie Lethier
Sophie Lethier UK100
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Finance
UK100's Parliamentary Officer lays out why success of the National Infrastructure Bank hinges on the design of its mandate and what parliamentarians should be asking of Ministers in the Budget debates to ensure fiscal policy is aligned with Net Zero and the levelling up agenda.

Last week, the APPG on Sustainable Finance, together with the Aldersgate Group brought together green finance industry leaders to discuss the Budget. UK100 Director Polly Billington and former Green Investment Bank Director, Charles Abel-Smith led the conversation, with Aldersgate Director Nick Molho and Green Finance Institute Chief Exec, Dr Rhian-Mari Thomas also giving insight on their work.

We were joined by Ed Davey MP, Chair of the APPG on Sustainable Finance, Kevin Hollinrake MP, Chair of the APPG on Fair Business Banking, Darren Jones MP, Chair of the BEIS Select Committee and Alan Whitehead MP, Shadow Energy Minister.

The APPG convened this roundtable to explore what parliamentarians should be asking of Ministers in the Budget debates to ensure that the government’s fiscal policy is aligned with its net zero target.

The government has yet to provide any clear answers about how it will finance the transition to net zero, but the Climate Change Committee (CCC) agrees that the next decade will be pivotal.  The CCC estimates that extra net-zero investment needs to grow five-fold from c£10bn/year in 2020 to around c£50bn in 2030, before peaking in 2035.

The National Infrastructure Bank (NIB) has the potential to be a key enabler of net zero, provided it is designed in the right way. It was announced with a net zero mandate, but the design of this mandate will be crucial to its success. Our work shows that to be most effective, the NIB’s net zero mandate must be place based, have an advisory capacity and provide development capital. What the Treasury announces today will be setting the framework for how the institution will develop. So what should we be looking for in the Chancellor’s statement?

The CCC recommends that net zero policies should be designed to enable local financing. We can “accelerate action by tapping into growing citizen and business demand for ambitious place-based measures.” But there is a gap between local leaders’ ambitions and what they are able to develop. A lack of resourcing has constrained the ability of local and combined authorities and city regions to build up investment pipelines tailored to place-based needs in collaboration with business and investors. In sum, local government lacks the capacity, tools and development capital to build this essential net zero infrastructure pipeline.

 

Why is local important?

We need big technology solutions like CCUS and green hydrogen, but we also need to decarbonise our transport networks and our homes, using proven technologies (energy efficiency, heat pumps, renewable energy generation, battery storage, EV charging) that are often not being implemented at scale (or at all) because of market failure. This requires action to be taken locally and provides an opportunity to create jobs locally, in places that need levelling up. We know energy solutions won’t be the same everywhere - we will need to design our local energy systems to take advantage of the different resources available across the country to support our energy demands.

Last July, UK100 and Siemens UK published an insight report on “Accelerating the rate of investment in local energy projects” which showed that £5 billion of investment could leverage as much as £100 billion of private finance through a local partnerships approach. 

UK100, the CCC and Siemens agree that the new National Infrastructure Bank could provide this kind of development capital, which would act as a catalyst for crowding in private finance. By focussing on the development phase of projects and taking on early stage risk, the NIB will be able to create a set of circumstances that allow markets to evolve. Businesses such as Siemens are positive about investing in place-based energy projects, but they need the confidence and clarity that there will be long term commitment by government to this agenda including helping address market failures.

The NIB could make the difference between finance going in sporadically, resulting generally in small projects as is currently the case now,  and delivering long term social and economic benefits as well as significant emissions reductions by supporting a programmatic approach. By taking on early stage risk, it can enable the creation of a pipeline of investible projects and programmes, and develop the jobs needed to deliver them.

A good example is the success of offshore wind in Britain, that started with the Green Investment Bank (GIB). It provided the capital to meet shortfall for construction, provided Contracts for Difference and cash flow certainty. But the NIB should build on the GIB, by having a much greater development role. The GIB’s mandate was focussed on crowding capital into green projects which were already being developed by the market in response to supportive government policies. The NIB should be enabled to create markets by de-risking projects. It must also have a strong regional operating structure with deep understanding of the local resources and networks available to support local energy investment. 

 

How will it do this?

UK100 recommends an approach that is place-based, with a strong advisory role. During the roundtable, Charles Abel-Smith said:

“We stress the importance of providing advice to local authorities in helping create and finance investable projects. This capacity needs to provide support beyond simply helping local authorities develop their own schemes financed by low cost public works loan board finance.

“The real prize lies in developing large integrated city or regional investment programmes in which local authorities are working closely with private sector partners to deliver integrated approaches which combine investment in energy efficiency, clean energy generation, storage and smart technology that enable our energy system to operate more efficiently.

“The challenge is to develop replicable solutions that can be applied across the UK and internationally.”

 

The consensus from the APPG roundtable was that the bank should:

  • Be a flexible and long-term financial institution.
  • Be independent with a clear mandate to make its own decisions.
  • Have a strong ethos of stakeholder engagement, reaching all parts of the country.
  • Provide development capital to de-risk projects to encourage private investors to come on board.
  • Have a risk-taking appetite. Managers shouldn’t shy away from risky lending to avoid blame on the balance sheets.
  • Be a proper bank, not a fund, with its own borrowing capability and a sufficiently large capitalization (appropriate to its mission and functions).
  • Be a public tool with a positive feedback loop between policy design and real world experience.

Our speakers also raised the issue of the EU’s ELENA funding. Cities including Bristol, Manchester and Leeds benefited from £23 million in funding, which led to over £800 million of private investment. We need clarity around what will replace it. 

 

Suggested questions for Ministers, from former Green Investment Bank Director, Charles Abel-Smith:

  • Will the mandate of the NIB include providing finance for the development of placed based net zero investment?
  • Will the design of the NIB include advisory capacity to support this development and the creation of new funding approaches which can support local authorities and the private sector to work in partnership to achieve this?
  • Would the NIB commit to support the identification and development of  a small number of local investment programmes that can operate at scale and be announced at COP26?
  • What elements of the NIB’s emerging energy strategy could have a strong local investment element in which local authorities would have an important potential role to play in making this happen?
  • How might these be shaped into programmes to create standardisation and consistency of roll out to make this happen efficiently and cost effectively?
  • What would be the optimal support structure that the government could put in place to make this happen as quickly and cost effectively as possible?