GFI0026
Written evidence submitted by the Institute for Energy Economics and Financial Analysis (IEEFA)
Introduction
The Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy. IEEFA welcomes the Environmental Audit Committee’s Green Finance Inquiry and the opportunity to make a submission.
Response to Inquiry Questions
Government’s level of ambition on green finance
IEEFA and HSBC Global Asset Management published a Green Finance Initiative report entitled “Renewable energy infrastructure investment opportunity for UK pension funds” in November 2017 published here http://greenfinanceinitiative.org/renewable-energy-infrastructure/ . The report provided commentary and evidence on the UK investment landscape in renewable energy infrastructure, and specifically the potential role of the £1.8 tr UK defined benefit pension scheme sector.
The report estimated that UK renewable infrastructure market is now of significant size, with operational assets valued at between £42-81 bn and with the planning pipeline additional market value of £25-66 bn. This compares with $2.7 bn of outstanding green bonds from UK issuers.
The IEEFA/ HSBC Global Asset Management report highlighted how UK pension schemes are already successfully investing into renewable energy infrastructure to generate required investment returns, and provided two case studies. We noted renewables infrastructure characteristics particularly suited to defined benefit pension funds, including inflation-linked, long-term, low-risk cashflows, and returns that are uncorrelated to public equity markets.
Regarding the Environmental Audit Committee consultation question on the impact of leaving the EU, our report reviewed the progress made by local government pension schemes (LGPS, total assets of £216 bn) under the current pooling initiative, which is due to go live in April 2018. We found that the increased size and expertise of the new pooled funds, together with targets to increase their infrastructure allocation, made the LGPS pools an important potential source of additional investment into UK renewables infrastructure. The new LGPS pools plan to double their average target allocation to infrastructure, to 7.5% of assets under management, implying additional investment of £8 bn if these targets were met.
Regarding the consultation question on structuring incentives for investment, our report made two recommendations. First, we suggested that the government could align the tax status of renewables infrastructure with that of real estate. Second, we suggested that as the UK moves beyond renewables subsidies, we might attempt to replicate U.S. success in engaging the corporate sector in signing long-term power purchase agreements for renewable electricity, alongside similar purchases by central and local government.
Regarding the size of the long term investment requirement across private and public sector, to meet the UK’s decarbonisation pathway as defined in the Climate Change Act, we understand that the current National Infrastructure Delivery Plan is not currently consistent with the Climate Change Act, and additionally only covers public investment. We encourage additional research to estimate the investment requirement for decarbonisation which will highlight the investment gap and can provide guidance to government on the suitability of its current policies.