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Green bank borrowing curbs could risk 11GW of UK electricity capacity

09 Jan 2012 15:47:51 | edem

The UK's push to meet 2020 clean power generation targets could face a massive funding shortfall within three years as a result of rules imposed on the government's flagship green bank by the treasury.

Any curtailment of the bank's right to borrow could ultimately wipe 11GW of potential deployable capacity from the offshore wind sector to 2020.

The funding constraint will emerge if the Green Investment Bank (GIB) is not permitted to borrow by 2015, which the treasury will allow only if the government meets its target for debt as a percentage of GDP to be decreasing. This, in turn, could depend on the level of economic growth achieved over the next three years.

Experts have said that in light of the wider economic outlook, the right of the bank to borrow from 2015 already may be in jeopardy.

"Politicians assumed we would have this bounce-back to robust growth by 2012, with a blue skies picture in 2013," said Charles Davis, Centre for Economics and Business Research macroeconomics head.

"But look at the eurozone, and look at the long-term impact of households being heavily indebted and of global inflation and commodity prices."

This could mean weak UK growth and make it harder for the government to reach its targets on debt reduction - which will determine whether or not the GIB is allowed to borrow.

Multi-billion shortfall

The GIB will initially be capitalised with £3bn (€3.6bn) of public money, which the treasury said will unlock an additional £15bn in funding from the private sector (see EDEM 23 March 2011).

Should the GIB's right to borrow be curtailed after 2015, the potential funding shortfall could amount to tens of billions of pounds.

This idea has been backed by Transform UK, the group that developed the GIB proposal. It proposes that if the bank is allowed to borrow £10bn, it would be able to leverage in another £50bn of private capital - an additional £60bn of investment in the UK low carbon economy.

A £100bn price tag has been slapped on government plans to drive the mass development of the offshore wind sector through to 2020 (see EDEM 26 January 2011). The sector is on course to deliver 21GW of installed capacity by this date, up from just 2GW today.

Therefore, a £60bn funding shortfall would equate to approximately 11GW of installed capacity - more than one-half of what the country intends to build on its push to meet 2020 EU renewable energy targets.

'Knee-jerk reaction'

The GIB's initial power generation priorities will be offshore wind and energy from waste. It is widely acknowledged that offshore wind will eat up a large share of the initial £18bn expected to be secured.

The debt-to-GDP target imposed by the treasury has angered many in the clean energy sector. "This institution should be allowed to operate independently don't overly constrain it. If it wants to borrow, and it can borrow, and it leads to a double-bottom line of profit and environmental gain, then let it do so," Transform UK programme director Ed Matthew said.

Matthew called the borrowing constraint a "knee-jerk reaction".

It was set because the treasury wanted to maintain a particular level of control over public finances, he said.

Growth conundrum

The situation will become clearer as the impact of the eurozone debt crisis on the UK economy is played out over the coming months. But some analysts do not think the signs are good for the GIB, as sluggish growth is making the debt reduction it relies on difficult.

Although the UK is engaged in a number of measures designed to boost funding in clean power generation infrastructure, Matthew underlined the importance of the GIB.

"It is one of the critical pillars to reach our 2020 targets, as well as maximising economic potential in the UK," he said. "If we don't allow it to borrow, we are in serious danger of missing our [clean power] targets." JS

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