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Appendix B Transcript of the Environment Committee’s first evidentiary hearing for the Developing a Green Economy in London scrutiny The Chair: Welcome. We would like a short introduction of your work and then we intend to look at the very, very important issues around the economy in London with reference to the environment. Dr Bevis Watts: Thank you, Chair. [Presentation attached at annex a to this transcript] Slide 1 - Dr Bevis Watts, Business Development Service I project manage a lot of WRAP’s work in the area of financing recycling. And that includes managing something called our business development service, and some of the new financial instruments we’ve looked at using to leverage investment into this sector. Slide 2 - About WRAP Just to give a bit of background to WRAP. We are a national Government-funded body with a mission to create stable and efficient markets for recyclable materials and products. We’re very much about strategic interventions in the market, in either the demand or the supply side, depending on where the key barriers exist in different materials and markets. Slide 3 - Grant Funding We currently only focus on five material streams - paper, glass, plastics, wood and aggregates. That remit is likely to evolve over time. We also have three generic areas of work. One is on the procurement of recyclable materials and products. One is in standards and specifications, particularly for the tradable recyclables that are collected. And then there is the financial mechanisms programme. I understood the thrust of today was to look at the barriers, particularly to financing the green economy and stimulating growth towards that, and that’s the area I’m going to focus on today. Slide 4 - Grant Funding One of the things we have done a considerable amount of is grant funding. We have made capital support available. This has been strategically targeted and one of our capital competitions has been for the development of an extra 330,000 tonnes of newsprint capacity in the UK. We have also done a considerable number of smaller things in aggregates, glass and wood processing. Our initiatives are always geared particularly at overcoming certain issues. So, in wood, where 87% of the secondary wood in the UK goes into the panel board industry, there is a need to diversify the industry and create new applications. So that the market isn’t controlled by a monopoly, we’ve tried to put money into new applications. We’ve also made R&D support available to 42 projects to look at some of the strategic technical barriers in various markets and encourage innovation. Slide 5 - Grant Funding However, as the informal session alluded to, there are considerable challenges with making grant aid available on an ongoing basis. There are also considerable problems with creating a very grant-dependent culture and a grant-dependent industry, which arguably the recycling sector has already become. Therefore, we’ve looked at levering in private sector money, and have looked at various instruments to do that. We started, however, looking at it very scientifically. One of our non-executive directors is a gentleman called Tim Sweeney, who was the previous Director General of the British Bankers’ Association and he’s always telling me that the issue of small business finance, in particular, is always overplayed. It’s always hyped up and up that money is not easy to come by, but when you get down to some of the specific issues, and model the availability of finance, there are readily available sources in most of the streams. Slide 6 - Market Barriers One of the things we started doing was a national consultation; 11 regional events including one in London to look at what the specific barriers were to investment in recycling. The slide shows some of the issues that arose. They’re in no particular order. They’re certainly not a comprehensive list. But there is a publicly available report on the subject which I can share with anybody who needs it. Some of the issues we pulled out were really specific and acute in recycling. One was to do with the specialised nature of assets as there is a non-transparent market for selling on assets after their useful life or their desired life within a business. To any investor they therefore represent low security and it’s also very difficult to get leasing arrangements for them. I want to emphasise that you need to take a step back and look at the particular segment of the green economy you’re trying to stimulate and identify the barriers. The Carbon Trust, looking at low carbon technologies, are dealing with very different businesses and technologies. We’ve also done some analysis of the required growth in the recycling sector if the UK is to meet the requirements of the Landfill Directive and we’ve tried to model a supply of finance to this sector over time. Slide 7 - The UK Recycling Sector and Investment Demand Some conclusions in brief. The recycling sector in the UK already has a £12 billion a year turnover. That figure is based on looking at all the players in recycling from collection through to the processing of a product that goes on to compete with a virgin raw material. £7 billion of that is generated by the metals industry, which is already a very mature sector of the economy. The remaining £5 billion includes light glass, light compost and so on. Based on current growth predictions we’re looking at a £30 billion turnover industry in the UK by 2018. We then work back from there and try to work out that what somebody’s reprocessing capacity will need to be if the UK is to deal effectively with its requirements under the Landfill Directive. We estimate an extra £5.7 billion investment will be needed by 2018 in reprocessing capacity alone. £1.5 billion of that will be needed by small and medium-sized enterprises. It’s that that we’ve really focused on, because it’s really in the SME market where there are real barriers to accessing finance. Slide 8 - Improving Access to Private Sector Finance This is how we’ve tried to address some of the gaps that we’ve identified within that £1.5 billion. One is a business development service. On the one hand that helps with small businesses, particularly the early stages, to make sure they don’t fall over a lot of the common small business issues in making their applications for finance. On the other we act as a sort of advocate for the financial sector, recycling, and the potential for growth. We’ve had some considerable successes really in engaging the private sector. There are two fundamental financial mechanisms that we’re going to establish in the next few months - one is the Lease Guarantee Scheme, to overcome the problem of asset risk and the fact that a leaser doesn’t really have any confidence in the secondary value of an asset in an immature market place or where the technology is particularly new. The other relates to the biggest issue we’ve found in modelling the supply of finance to the sector ie the supply of equity and we’re piloting an equity fund for early stage or developing businesses. The reason that there is a particularly acute gap in equity funding is largely down to the lack of market information or understanding. It’s also down to the size of investment that’s being sought. If you want to try and raise funds below half a million, it is by far the most difficult margin to operate in. But that is a sensible amount to be raising if you are a new composting business, and a new wood recycler, or whatever? A word of caution on equities. I have come to distrust ethical funds. Slide 9 - Future Areas of Activity Just on some ideas of future areas of activity and particularly in relation to looking at it more regionally, it’s certainly interesting to hear that London Remade is already starting to think about modelling the investment requirements that London might need, and we’ll certainly supply some of our work there, to help them extrapolate it. There are acute problems with direct support to industry that we’ve already touched on. And I think we’re very focused on trying to engage Government in funding, providing additional funding for collection initiatives, which will directly benefit the private sector in due course. And that’s really where the thrust of future funding mechanisms needs to be. There is also a need for increased support for small businesses. In this sector, we see particularly inexperienced management and we need to engage entrepreneurs and people who have the experience of managing growth in a business and so on. And that’s certainly something that is best delivered on a regional level. So, they’re just some ideas for further reference. The Chair: Thank you very much. Zoltan Zavody: My name is Zoltan Zavody from the Energy Saving Trust. I’m a policy analyst. The Energy Saving Trust is a non-profit organisation with most of its funding, something like £80 million, coming from central Government. That’s for programmes UK-wide including the devolved administrations. We work in three areas - domestic energy efficiency, clean vehicles and small-scale renewables. On domestic energy efficiency, we run a variety of programmes, and that’s probably where we’ve made our name. We run a number of programmes for developing the infrastructure for delivering energy efficiency to the domestic sector. And that involves, amongst other things, offering grants to local authorities for innovative projects, and providing them with a hand-holding support service. We have a UK-wide network of 52 energy efficiency advice centres, which offer energy efficiency advice to householders, and some of them are going further and actually assisting local authorities with the development of their strategies for energy efficiency and energy more generally. And I should also mention our consumer campaign, which is called, “Energy Efficiency”. The highest profile for that is in autumn, on television, during Energy Efficiency Week, when the heating season kicks in. So, that’s our consumer campaign, which is hopefully being picked up by a few Londoners as well. Just to touch on our other programmes. On transport we have two programmes - “Clean Up” which is about particulate traps for heavy duty vehicles and “Power Shift” which is about conversion or grants for new vehicles running on LPG, gas or electric hybrids. I’d like to make a point that I made earlier about the whole concept of energy efficiency, of small-scale renewables and so on. The point has two strands. One is that money spent on energy that’s generated far away, will go far away. It won’t stay in the local economy. Money that’s not spent on electricity generated far away, because there’s energy efficiency in place, or because the electricity is generated locally, that means that the money will circulate in the local economy. The second point is that healthy people in warm homes will make a bigger contribution to the economy and social inclusion than unhealthy people, blocking beds in hospitals because of respiratory and other causable diseases. Neil Wallis: One point. Zoltan mentioned renewables, but he didn’t say that we’re also responsible for running programmes on behalf of the DTI for mainly small-scale projects throughout the UK. The Chair: One of my missions today is to try and iron out where everybody is connected, and who is related to whom, and where the energy advice comes from, and where it goes. In energy terms, I am completely lost with the myriad of advice that is available and whose job it is to do what. Dr Vincent….. Dr David Vincent: Thank you very much. [Presentation attached at annex B to this transcript] Slide 1 - Presentation Overview I want to first of all give you an overview just in case you’re not aware of the Carbon Trust and its objectives. That’s a sketch of what I’m talking about. Slide 2 - Environmental, Health and Economic Drivers The biggest drivers that we see are a mix of environmental health and economics. Primarily of increasing concern are global warming and man-made causes of global warming, principally the emissions of CO2 and the other greenhouse gases. The need to improve air quality in urban areas is another driver that we see will become increasingly important, as will the need to improve resource efficiency in business and commerce generally. There are ways in which energy policy laws can be achieved by moving towards a low carbon economy; in particular diversity of energy supply through increasing use of renewables, and the security of supply in terms of reducing our dependence on imported fossil fuels. You may be aware that - and it won’t be many years now - we will become net importers of natural gas. Of course there is a huge and growing global environment and energy technology market. As one of our specific objectives we wish to encourage the development of a low carbon sector in the UK, which can capitalise on those global opportunities. Slide 3 - The Carbon Trust - We were set up in April 2001 by the Government and the devolved administrations with about a £50 million budget, partly from the fuel levy receipts, and partly through voted funds from Parliament. Our objectives are threefold: Firstly, to ensure that UK businesses and the public contribute fully to the ongoing targets for greenhouse gas issues - obviously we have got our own clear objectives, we’ve got the Government’s domestic goal of the 20% target by 2010, and there may well be targets which are even more onerous. If you think about the World Commission on Environmental Pollutions recommendation of a 60% cut in CO2 emission by 2050, that gives a feel of the scale and the step changes that will be required in our economy. Secondly, to improve energy efficiency which in turn helps improve the effectiveness of UK business generally and to improve resource efficiency. We think that’s very, very important. There are huge savings to be had. Report after report talks about 20% savings in the non-domestic sector to improve efficiency. And these savings can quite often be achieved for relatively little capital outlay. And thirdly, the most important development for the UK energy sector is that can capitalise on the innovation and the commercial value of low carbon technologies nationally and internationally. It’s a very powerful brief that we’ve been set by the Prime Minister. Slide 4 - Action Energy We have a number of programmes helping us achieve our objectives. The first programme, Action Energy, is formally the Best Practice Programme. It seeks to maximise carbon saving and investment. Looking at the application of today’s technology and know-how, it is not inviting companies to take on rocket science about which they know nothing and may care about even less. It’s about how one can take conventional energy efficiency technology, get the technologies designed and into buildings and industrial processes, and to provide the energy management know-how to get the most out of those technologies. I am thinking here of very simple activities in buildings - I am looking at energy efficient air conditioning, in areas where you need air conditioning. I am looking at low energy lighting systems. All these technologies actually exist today. They are simply not being utilised anywhere near enough to achieve those 20% target savings. Slide 5 - £10 Million Energy Efficiency Loan Scheme for SMEs Within the Action Energy envelope, we launched last summer an Energy Efficiency Loan Scheme for small and medium-sized enterprises, up to £50,000 per loan for energy saving projects. It’s the full project cost including installation. This is designed to stimulate activity and overcome capital resource barriers which you know exist in the smaller companies. We are looking to seek energy pay-back in under five years. There are a number of projects which can achieve that criteria. And through Action Energy surveys, which is run under the Action Energy programme, we can help identify the primary investment opportunities. Slide 6 - Enhanced Capital Allowances Enhanced Capital Allowances - that was also a package launched by the Government in April 2001, as part of the Climate Change Levy package. It gives 100% first year capital allowances on qualifying energy saving equipment. That’s the generic list of technologies. Nothing rocket science about that. Some very basic - pipe work insulation - stuff. You’d be surprised how opportunities to improve the insulation of pipes - it sounds really boring - are missed. It’s money for the taking. There are within that suite of generic technologies and measures, 3,700 commercially available products which you can pick up by looking at the ECA website. The products will carry a badge. One of the important issues nowadays is to make sure we differentiate products. Those products which have a better energy efficiency footprint and performance will carry the Energy Technology List logo. It’s important to discriminate or differentiate between products, so that potential purchasers can see what they’re getting. And increasingly that list is developing a momentum of its own, primarily to identify those opportunities where you get the EC allowance. What businesses and manufacturers are recognising now, it is becoming a procurement list, bit by bit. People recognise that in that list, there will be quality products in any case, not just for their energy efficiency performance criteria. Slide 7 - The Low Carbon Innovation Programme The Low Carbon Innovation Programme - this is probably the one, I guess, nearest the interests of the Environment Committee today, is our Low Carbon Innovation Programme. There are four strands to the Low Carbon Innovation Programme - planning, research and development, demonstration (carbon finance was a kind of equity-funded initiative) and market diffusion. In a way the market diffusion one is the little Cinderella at the back that people do tend to forget - they focus on the technology at the front end, and not realise there are a whole host of non-technology barriers, which need to be addressed roughly in the same order as you’re trying to overcome the technological barriers. These are exactly the points we were making in the informal session earlier, about capacity building and training, education and awareness. It is part of the educational inadequacies of how we train our scientific engineers today with a focus on the technology. The eyes have to be lifted to understand that to deploy the technology, you do need to address and overcome the non-technological barriers. So, it’s no good making the most wonderful piece of low carbon technology you can imagine, if you don’t have the supply chain and the service provider chain suitably equipped to deploy and maintain that technology. That’s a very important part of the low carbon innovation programme. I just want to spend a couple of moments on carbon finance because it is currently in front of the state aid officials with a decision due in 14 months or thereabouts. We have been steadfastly putting forward our indications for over a year now, and it’s getting to the stage that we think how much longer have we got to go through this process, before we can get a tick or a cross. Because carbon finance and overcoming the equity gap is really one of the most important factors that we see in bridging the gap between having a successful demonstration technology, and moving towards commercial viability of products and manufacturers in this relatively new industry. There are technological risks. There are insufficient specialists in the venture capital market who know about the technologies and, therefore, there is a certain degree of risk averseness. Generally speaking, there’s not a lot of capital available for investment of this nature. And that’s quite an important gap that the low carbon innovation programme is seeking to fill. Slide 8 - Research and Development Now R&D, that’s self-explanatory. I will just draw your attention to the bottom line. Our new venture with the Engineering and Physical Sciences Research Council - it’s a £40 million/three year activity - in the first instance it is seeking to bring together top quality university teams in the low carbon technology areas with those businesses who have technological ideas and products to develop. The idea is that the powerful research expertise we see present throughout our universities will be harnessed to develop new technologies with a business side to their commercialisation. It won’t just be academic research for the good of the science base, it’s something that is beyond and above that which is going to help create wealth for the UK with a new low carbon technology standard. That’s an exciting initiative and we really hope a lot will come out of that. Slide 9 - Demonstration Project Demonstration Project - and this is possibly something which will be of particular interest in this debate on the London green economy. There is a huge opportunity through demonstration projects to begin to influence behaviours. There are companies who do take the initiative and do take a step further than the building regulations, for example. Unfortunately they are very few and far between. They need to be encouraged. The benefits in terms of not just carbon alternate efficiency, but in crude tenant satisfaction with the building, need to be logged, monitored and presented in the way that letting agents and the speculative building industry in the UK will appreciate. That is quite a difficult trick to pull. The possibility here in London, where there are some extremely high profile companies, to take the initiative and work with the low carbon innovation programme and the others, to demonstrate top quality low carbon buildings. We would be very interested to pursue that. Slide 10 - Carbon Finance Carbon finance I mentioned a little bit earlier. The equity gap is also quite interesting in terms of scale of activity. I just draw your attention again to the bottom point. We’re looking to go from 250k upwards. There is a gap in terms of availability of venture capital, and there is a gap in terms of the conception of the size of project that is relevant to low carbon technologies. It is in this general area, £1/4 to £11/2bn, that certainly we feel can be material. Other venture capital companies will make their own assessments of the scale and size of the project. Unfortunately they are very few and far between. Slide 11 - LCTA 2002 I mentioned the importance of capacity building and training. Just let me mention this very briefly as we look at the last slide. We have just carried out an assessment of 50 or so low carbon technologies. You can get the actual hard copy from The Carbon Trust. It divides those 50 or so technologies into four bands. The “focus area” are the ones where we obviously will be focusing on. The “consider” ones are where we think there will be the potential of technological improvement, therefore promoting those technologies into the “focus” category. The “review periodically” are the ones where we in The Carbon Trust feel that our own resources are not going to be material; we won’t have the kind of impact that we think we would have on other technologies. The “monitor” again are the ones where we don’t think they’ll have impact in terms of £1 or £2 million investment project, but there is, nevertheless, a high carbon saving technology impact. I think that’s probably the end of my presentation. The Chair: I would certainly like the Committee to have a copy of that. John Rose….. John Rose: I think the first point that’s worth making is that our role is actually as regulator of a scheme, as opposed to a funding body. Broadly speaking, ENTRUST regulates the Landfill Tax Credit Scheme; a scheme that’s been in existence for six years, which is about to go through quite radical change, firstly at the end of March and then in the summer of this year. Broadly speaking, the scheme can support a number of categories, which contribute towards the green economy. They vary from the redevelopment of brownfield sites, importantly projects with more sustainable waste management practices which I’ll come back to in more detail, to the regeneration of public open spaces, green spaces, et cetera, and the public buildings that are listed or are of historical interest. It’s quite a wide remit. The key thing to understand with this scheme is that ENTRUST regulates it. Effectively our role is to look at organisations and look at projects and judge whether they comply with the current set of regulations, as opposed to making decisions on which projects are supported and the value of those projects. And that’s the point I’ll come back to during questioning, when you’re looking at the pros and cons of such a scheme. As I mentioned, during the last four to five years, we’ve seen a wide variety of waste-related projects, which of course will be of interest to this Committee, varying from education, research and development, dissemination; and within the category of R&D, significantly everything from pilot R&D practical recycling schemes right the way through to research. This is about to change, because from the Government’s pre-budget statement, the Chancellor announced that the waste-related elements of the scheme would be removed from the scheme as from 31 March of this year. So, again, I think what’s important for the Committee to consider is what it might be like with the future scheme. What we’ll see is a current scheme of about £150 million a year, supporting broadly six categories of projects, being reduced to a capped scheme of £47 million a year which will still include projects such as land mediation, public open spaces, et cetera. However, it will exclude waste-related projects. The replacement the Government has talked about to date has been a scheme of £100 to £110 million per year. The way that will be divided up is not clear as yet. The only thing the statement does say is that the devolved administrations will be given the responsibility for their share. Working on the normal formula, the Barnet Formula, that means immediately they’re likely to remove about £18 million out of that £100 to £110 million a year. This would therefore be the remainder left for England. Of course, what you also need to consider within that, is the need to support current projects that are of strategic value. It may well be that there is a further top slice taken from any future funds that are available. It’s not yet clear whether the replacement scheme will run under the current guidelines or change significantly. I think there is room for political influence into what the future scheme might want to achieve. I know, from our point of view, we’re interested in working with both Customs & Excise and with DEFRA and other Government departments, to ensure that the remainder scheme is probably a little more strategic in achieving Government aims. The Chair: Can I just clarify a small point with you. You said £110 million a year would be for the waste industries. John Rose: That’s the indication in the pre-budget announcement. The Chair: And when you said about the Barnet Formula, was that pre-supposing that it would be along the borough guidelines? John Rose: I’m not sure how the money will be divided up in England. In the statement, it only goes so far as saying the devolved countries will be given their share of the finances. Having talked with the Welsh Assembly, they indicate that, for example, in Wales, that would probably equate to £5.5 million or somewhere around that. I understand that Scotland is closer to £10 million, Northern Ireland is likely to go up to £1.5 million. How the funds will be administered in England is very much at an early stage. From what I can make out from the sparcity of information that’s out there, it is not decided how the public spending programme will be administered. The Chair: You’re talking about the future funds, not the legacy? John Rose: That’s the future fund, the £100 to £110 million. The Chair: I think we should note at this point that the Committee have made a position in rewarding recycling and how London should spend tax credits. Maybe you weren’t aware of our position, but we think it should be strategically spent across London and, since we produce so much rubbish, we should certainly get a good share of funding in order to deal with it. Graham Tope: We ended on the Barnet Formula, which as John said really only applies to Scotland and Wales. There is much debate on (a) it’s long overdue for revision anyway and (b) whether it should be extended to the regions of England, including London. I didn’t want to lose that point but because it’s a bit outside our scope I would like to suggest it might be something we could think about when we come to it again. I actually wanted to start with barriers, which we spent quite a lot of the informal session talking about. We identified cost, short-termism then, I think, and - a British disease - capacity. I was slightly surprised in the informal session, nobody really talked about risk, but it did come up in the presentations. It seems to me that risk, whether real or perceived, is actually quite a strong barrier. I just wonder whether our witnesses would agree with that. What I wanted to ask about here was not what are the barriers, because I think we have identified a lot of those, but to ask you to say a little bit more about how we get over or round those barriers, and what we can do to achieve that. Zoltan Zavody: I will briefly answer your question directly with a high level response, which is that if you have a long-term framework, and a long-term strategy, at whatever level, ultimately central Government or a London level, setting out a reasonably solid idea of what policy will be in the next few years, then industry and others can invest in technologies, and processes, and so on. An interesting example of this is building regulations where, in the last review in England, it took about five years from initial consultation to finally agreeing on the regulations. Once we were coming up to final agreement, industry said, “Well, we couldn’t possibly agree to those standards. We’ve only got a year to implement them”. Had Government set out five years in advance broadly this is where it wants to go then industry would be able to invest and do the relevant research without feeling that it may be let down in 10 years’ time. That’s the point about the long-term process. Dr David Vincent: Adding to what Zoltan was saying that the building regulations are one of a fleet of regulatory drivers. The other driver which is going to come in shortly in the next two or three years is the European Energy Prudence in Buildings Directive. That is a directive which for the first time will enable buildings to be labelled as to their energy efficiency performance. That’s the beginning of bringing some transparency into what is a very opaque market. Consumers of buildings don’t know and maybe are not that bothered about the energy efficiency importance of the buildings they’re thinking of procuring. The issue for us is those buildings have a very long lifetime. The usual design life is 60 years. So, if you get it right, to start with, you’ve got year on year improvements in energy efficiency and low carbon properties to measure. The European directive will have the potential to raise awareness, to discriminate between buildings of different qualities and through, we would hope, public procurement policy there will be a preference in favour of the low carbon building for public procurement purposes. The Chair: Can I just ask very quickly, we’ve got the London Plan out and the public examination is happening early in March. There is a sustainability section to it. I wasn’t really aware of the contributions your bodies had made to the EIP. I know that as an Assembly, we’re supporting low and zero carbon construction. I was curious if you’d made a contribution and you’d come into the EIP. If you don’t know, you can come back to us. Zoltan Zavody: We hadn’t planned to. The Chair: But I do need to contact you before the Assembly contribute on that. The procurement that you talked about, David Vincent, that is happening next year, isn’t it? Dr David Vincent: No, the European directive will come in around 2005 and there will be a derogation over a period before it is fully applicable to all buildings. The Chair: But to Government buildings -- Dr David Vincent: It’s not just Government buildings, it’s all buildings. Graham Tope: You made mention too of state aid and problems with Brussels’ European Commission. Could somebody say or tell us a bit more about this? Is this part of the EC’s competition policy? What is the problem exactly and what do we do about it? Dr Bevis Watts: I think the problem essentially is the timescales and complexities involved. The actual nature of the goals that they’re working towards are not necessarily the issue. How you address it is at the early planning stage on all of the measures you’re going to put in place, to address, not just the financial ones, because several others may come under de minimis aid or aid in kind, and so on. I guess an earlier understanding of the environmental guidelines, if you’re looking to put an umbrella of measures under applications to environmental guidelines, would be a key development, rather than doing it on an ad hoc, case by case basis. Graham Tope: Can you tell us what opportunities there are for linking public and private sector investment and whether there is more scope there. Dr Bevis Watts: I think this comes back to your issue of risk. You’re right. A lot of these barriers boil down to risk, technological or purely financial. Really, we’re trying to create mechanisms in our equity funds and the Lease Guarantee Scheme that move beyond the grant. I think that’s a very forward thinking approach. To look at the earlier stages, the R&D and the innovation, there is a need for a grant. Then perhaps there is a need to address some of the intermediate risks that there will be. What we’re trying to do is not offer an entirely soft option for businesses in our equity fund. We are levering in a proportion of the private sector funds using WRAP money as a cornerstone. The vision is for this pilot to actually co-invest with other funds, with independent and private investors, to provide some track record. I think that’s something which will receive a very warm reception. They are gaining comfort in that not only is public money there to soften their risk, but actually that it’s coming with some expertise and some credibility. WRAP has been involved in assessing this proposition and its place in the market place. That’s the opportunity to match skills with the money. John Rose: With the Landfill Tax Credit Scheme we ended up in a situation where the Government was saying it wanted to see more money spent on waste-related projects, but the regulations stated that the organisations receiving the money could not engage the waste industry in those projects. So, you have a situation there where you’re beaten before you start to a certain extent. I would therefore encourage a very careful strategic look to ensure that fully open and transparent policies are in place, which allow you to engage the industry which you will depend upon to deliver those targets. Dr David Vincent: Just a comment on what was said about risk and investment. One of the points I think that was made was to do with state aid. We have to be a co-investor in carbon finance projects, i.e. we have to find a private sector investor to partner. The rate at which we can attract private sector investors to come into the low carbon technology area is thin. It’s limited. That becomes a limiting factor, rather than the growth and abundance of bright ideas. So, that’s quite an important barrier to start addressing. One of the elements of the notification of our funding schemes to Brussels is to seek to push the boundaries a bit further, in terms of what those guidelines will accommodate. That is quite an important issue from the point of view of kick starting small companies with technologies but insufficient backing. Graham Tope: Is this an issue you think we should pursue? Dr David Vincent: It comes back to the point I was making in the informal session. It really depends on what objectives we’re seeking to achieve here. We’re seeking to achieve a low carbon footprint on London. You don’t necessarily have to have stimulated the manufacturing capability. That is a UK-wide issue, not just a London-specific issue. So, it really depends on what we’re focusing on. Graham Tope: There is a reasonable amount of funds available now to pursue all of this. Are they all taken up? What I have particularly in mind are SMEs. SMEs, in my opinion, are notoriously difficult to get to and to get at. Are all the funds taken up and, if not, what can we do about that, particularly with a view to SMEs? Dr Bevis Watts: Shall I start with recycling? It depends on the type of finance you’re looking at. If you’re looking at leasing debt equity we concluded, through modelling and various consultations with both industry and the financial community and their representative associations, there are huge gaps in the supply of finance to this sector. Actually one of the issues going forward, and an area for some public intervention in the next 10 years certainly, is that there is a lack of market understanding and willingness to engage in what on paper is actually quite a small sector. For that reason you’re not seeing people design the products to supply finance to that sector. The Chair: I am conscious that the conversation is really around bringing in the private sector. John Butt ……. John Butt: My name is John Butt and I am from Conduit Ventures, which is a venture capital fund focused on the hydrogen economy and, with that, different types of fuel cells and related hydrogen technologies. I will try, as much as possible, to broaden this into other technologies, but really we’re looking at the green economy largely from the fuel cell, hydrogen perspective and there are several reasons for that. It’s a private sector fund. The investors are Shell Hydrogen, Johnson Matthey plc and Mitsubishi Corporation. What we do is we invest in unquoted companies, start-ups, which have products which have gone out of the laboratory. We take a lot of technology risk, but we like to see that the box has gone out of the research lab where there’s a good chance that it’s going to be commercially viable. We don’t only invest in the UK. We look at continental Europe and North America as well. Nonetheless, we’re UK-based. Now, in the context of barriers, what do we see? It was very interesting to hear risk come up. In our view we see development cost as a major barrier as well as funding risk to get the projects off the ground - all of these items are inter-related. It’s a chicken and egg dilemma. The other barrier is the absence of a roadmap, which could identify the key technologies that would create a viable green economy within the London area. Obviously from our standpoint, we have identified that as being the hydrogen economy and fuel cells, but we do know that there are others in existence which converge towards these technologies. One therefore has to say, “Okay, what are the different technologies out there, both in the upstream and downstream side, which are viable, such that the appropriate resources, both people-funding and the facilities which could be allocated?” The other thing is that there are a diverse group of funding sources, all of which are sitting here. However, it’s about pooling those resources and attaching them to the roadmap. New technologies and opportunities can be expensive and it’s difficult to talk about just the London area without looking at it in the national or even international context as well. The UK as a whole, particularly London, has very, very strong innovation expertise. It’s first class. Also, the UK has a very strong supply base in the wide range of green technologies, be it on the PV, on fuel cells, on hydrogen. Those can be harnessed or leveraged. Obviously, there is the absence of public awareness. I think a lot of people still feel the technologies are something exotic. Some of them are not. It’s about adapting technology for viable use. Alistair Perkins: I am Alistair Perkins. I am here on behalf of CIT Structured Finance. CIT Group was founded in 1908. It’s a very large, commercial finance company. It has a single A rating and assets of $50 billion. It focuses purely on asset and commercial based financing, so we provide financing for aerospace, shipping trains, telecom and media, infrastructure - on the infrastructure side, we’re heavily involved in the PFI and PPP market - and power engine renewables. I work in the Project Finance Group in renewable energy. That’s really my field. And we finance a number of renewable energy projects, primarily wind, energy from waste and geothermal projects, large-scale geo-therm power plants. That’s really my focus. We are talking about risks. I suppose really one of the barriers and the key features in renewable energy projects that I see, are the legislative risks, and the risk of changes in law. We are a long-term lender. Talking about the roadmap, we will provide finance for long periods of time after the venture capital has developed the technology. It goes through implementation and we want to develop a large project. So we take a very long-term view and we will invest for 15, 20 years and over, in some cases. For us, the cash flow reliability is very important. Also technology risk is a key issues together with the overall commercial package too. By the commercial package, I mean long-term contracts, et cetera, which will enable us to lend long-term. They have to be matched with the kind of package. Often, renewable energy developers are less experienced and, therefore, just putting together the overall package is often less well thought out. Roger Evans: What are the big constraints that you find in encouraging more investment in green technology? Alistair Perkins: We’re trying to encourage well thought out projects. A lot of things come to us which are either not well thought out enough or they’re at too early stage and the technology is very, very speculative. That’s really where John comes in. I think where we come in is where the technology is more proven and there’s a prototype in place, or another project that’s successfully operating. That gives us a lot of comfort. We have something we can point to. I think there is a shortage of venture capital type finance. That’s really where the hole is. On the project financing, there are plenty of banks out there with project finance groups. With the current state of the power market, a lot of them are looking to divert that funding into renewable energy. So there is no shortage of finance, but there is a shortage of well thought out and well developed projects coming through. Roger Evans: What does a well thought out project look like to you? Alistair Perkins: What I mean by a well thought out project is something where there are contracts. The commercial package is there. Roger Evans: So they have got to have a market? Alistair Perkins: They have a market. You know what the income is going to be with some certainty. You know what the cash flow is going to look like. I think one of the key problems with renewable energy is the risk of change in law and because generating renewable energy is still more expensive. It is coming down in price and getting more and more competitive. But renewable energy is still generally more expensive than conventional power generation. So, therefore, it does require incentives, whether those are tax incentives or just incentives on extra revenues. Roger Evans: So, are you looking for an immediate return or a return in ten years’ time. Alistair Perkins: It’s long-term. We are looking at return over the long-term but that does require the project to stand up economically with fairly stable cash flows. We have to know we’re investing in a sector where the rules aren’t going to change in two years’ time. Whatever the current assumptions we’re making about investing long-term, rules change and our current assumptions become invalid. Roger Evans: I get the feeling you might have had a bad experience. Alistair Perkins: No, not at all. I think some of the frustrations we have include, for example, renewables obligation certificates. At the moment that’s working extremely well. But the targets are only there until 2010. So, people come to us, they have a project with a life of, let’s say, 20 years, and they want to get plenty of money to meet the useful life of the project. It’s very difficult to lend them 20-year money when any certainty of the cash flows we can forecast only goes out to 2010. I think it’s got to be matched with legislation and the whole economics have to have a long-term perspective in order to get long-term financing. The Chair: Where are electricity prices in that? Where do you fit that in? Alistair Perkins: Well, certainly on renewables. I think a lot of banks have been burnt very badly on taking merchant risk, i.e. market pricing risk. People are now going back to looking for long-term contracts. John Butt: Yes, before a project gets to the stage where Alistair would look at it, there’s a further bottle neck, i.e. further development capital for R&D and working capital. I think the type of projects Alistair would back are those which are proven and that’s where a different type of capital, other than venture capital, would be required and can play a role. At this moment, it’s a chicken and egg situation and Alistair talked about half-baked projects. I think the nature of these green technologies means that at some point they will converge. But you currently have disparate groups that have not fully evaluated the viabilities of those technologies. The fact that they are emission friendly does not mean that they are commercially viable with a large market. So the point I am trying to make is that at some point, maybe further upstream in the provision of capital, there has to be some form of - I keep going to the issue of a roadmap - but you need demonstrations. For instance, I understand that there is going to be the Hydrogen Bus Project this year, sponsored by some of the car companies. People like ourselves and different capital providers, who would co-invest with us, to help get a project off the ground. You just need to see things working. We need to see a hydrogen refuelling station. And that has a leveraging effect. It stimulates other parts. It incentivises the guy at Bath University or Imperial who are tearing their hair out, saying, “We are looking for finance”. And again, because all of these technologies at the end of the day have to be as good, as a minimum, or even better than incumbent technologies, we are talking about codes and standards. The ADVs, the Johnson Matheys of this world, will -- people don’t want to change their systems. It will cost too much to blend in. Roger Evans: Is what you’re saying an argument for you being involved in research projects right from inception, right from when the idea first comes into someone’s mind? John Butt: Research projects require a different type of capital provider. When that has been incubated up to a certain point and there is a clear indication that it could be commercially viable, there’d still be technology risk, but that is where we would step in. Roger Evans: Obviously we face a lot of problems from a governance point of view, where we can go two ways on the way people behave. You can either go backwards, restrict the way people behave, stop them driving their cars, stop them producing so much waste, stop them using so much energy, or we can say we accept they are going to behave in that way and we will use technology to mitigate their behaviour as far as possible. I know I am an enthusiast for that particular approach. As someone in government who is an enthusiast, what do you need from us to encourage more of this type of work in London and make London a world leader in environmental technology? John Butt: The first thing is to identify the technologies and put together a roadmap; critical milestones, guidelines. Pool all the resources around this table to make it happen. Roger Evans: I don’t want to do too much, because I’m not good at it. I want the people who are good at it. John Butt: And you obviously have to have the institutions. That’s very helpful to pooling our resources, the institutional building, the focal point for that, because these technologies have to be adopted. For instance, the GLA could be a first customer, the market adopter. It’s got to be seen, it’s got to raise the public awareness. That is nothing strange. Then that leads into a certain element of standardisation, codes and standards. People don’t want to change too much. I think I may be wrong, but that’s the impression. At the end of the day, you want the private sector, people like ourselves, to put money into it. And then those who initially incubate it step back. Alistair Perkins: From what I’ve seen, it seems that Government, probably quite rightly, has decided not to back one renewable technology at the expense of others. And you can say let them all evolve, which is fine. It’s probably a good thing. But on our side, it’s quite difficult to know, because there’s no clear roadmap and there’s no particular sector that’s being encouraged. We don’t really know which technology to invest in, particularly in the long-term. The Chair: That’s what I was going to ask. I’m very aware that we have decided not to back a winner. In the light that John Butt needs some form of winner chosen, David, do you have a particular perception of where The Carbon Trust is coming from on this? Dr David Vincent: Well this was certainly one of the reasons we decided to carry out our low carbon technology assessment study last summer. It was because, faced with the dozens and dozens of potential technologies in which we could think about investing, we did not think that spreading our resources, which are roughly £25 million per annum very thinly across all those technologies made a lot of sense. So, we assessed where it was that we thought that the carbon savings potential was strong and also where we, with our envelope of £25 million a year, could be material, because with that kind of funding, we are unlikely to be putting in more than a couple of million pounds into any single venture. It’s too much in terms of unbalanced portfolios. Faced with that size of project and the areas of technology, we carried out the assessment and we came up with categories where there is plenty of opportunity for The Carbon Trust, with its size of investment and the degree of contribution to CO2 segments, where it could make a difference. There will be those technologies, for example nuclear fusion, and we will never be in that business; we simply can’t make a difference, and it’s not an area for The Carbon Trust. But fuel cells, hydrogen economic infrastructure, photo conversion, those kind of areas are of interest to us. And we will be beginning to become more proactive. When we invite calls for proposals, as we have been doing in the last six months, when we start our new round of proposals next month, we will be more proactive in those areas of technology where we think we can be of use. Darren Johnson: I want to pick up on this whole area of networking and accessing funding and information. Is there adequate information about where to go for advice, help and where to go for funding for new projects? Dr Bevis Watts: In summary, no. The business development we set up essentially tries to be that broker; on the one hand providing advocacy to investors and on the other trying to get projects that do stack up and that are passed at the very early stages of development. I think there is a lack of transparency generally in people who are perhaps a bit more open minded to this sector, and the phrase, “venture capitalist” shouldn’t be taken too lightly, because certain people have different interests in terms of the size of deal they’re after, the specific sectoral interests and so on. And that goes for the debt market as well. Some of the banks are very focused on waste and energy. Others aren’t really focusing on those areas in terms of specialisation at all. Darren Johnson: It would be useful to get a view from the receiving end. John Butt: That is actually very, very true, because I think we actually receive a lot of proposals at different stages of development and from different sectors. It’s in our interests to help people along. So, if it doesn’t fit our criteria, we pass them along to someone else. In the past, I think I sent everybody to The Carbon Trust, but now I know more people to send to. We will try our best, but the lack of transparency on the different sources of funding, depending on the stage of their development is key. Darren Johnson: That’s useful on the information about funding, but what about the funding itself? Are the levels adequate to make a difference? John Butt: If you compare it to the types of funding in other countries, for instance both private and public, I think it’s probably quite a lot. Darren Johnson: Are you aware of projects that have actually failed because of lack of funding? John Butt: I know of projects which have been struggling. They didn’t fit our criteria in the right areas, and I hope that they’ve got some funding now. There is evidence of success stories however because if you look at what’s happening in The Netherlands, Germany and small cities like Vancouver, there’s huge success. Companies there can access the public, private investments at the early stages. Darren Johnson: What would you say are the main factors which led to the lack of success? John Butt: It’s certainly not a lack of expertise, because it’s here. I think it’s very difficult to pinpoint it. It’s a very soft issue, a lack of focus, pooling together all of these resources - financing people, facilities, having a focal point and allocating the resources appropriately. Quite frankly, the expertise is here. Darren Johnson: What about the problems of the general bureaucracy in terms of accessing and managing public funds, and in terms of actually meeting the conditions. Do you find there are too many conditions imposed on the use of those funds to help a successful project get off the ground? John Butt: I don’t know enough about the conditions each individual public funding agency imposes. The Chair: Can I ask a very basic question? If I take solar water heating as an example, solar water heating is tried and trusted. It is not rocket science and it is not a new technology. It is there. It is available. It isn’t exactly massively expensive, I would suggest. £1800 would buy you nice solar water heating. It’s carbon reduction, it’s not a renewables obligation. It can cut water heating in the home by 50% to 70%. It’s quite good in energy saving terms and certainly CO2 commitment terms. So, it’s not something that we need to worry about the technology of it. Why hasn’t something like that hit the ground running and mainstream, and where do we go with the funding of it. John Butt: One of the first things is that we don’t know enough about it, which would stimulate that adoption. It’s a question of who’s going to adopt it first. Again, demonstration needs to be shown, at least from our standpoint. The Chair: I think the demand will go up for this product, the prices come down like everything. Anne Gardiner, you have said consistently it’s still too expensive to be able to take on. But creating a demand for it would bring the price down. So what can we do for such a technology that is tried and trusted and works? Zoltan Zavody: One of the things that the Energy Saving Trust is rolling out is the renewable energy advice service - and that’s on the back of the energy efficiency advice centre network. So, we’ve got an existing infrastructure, giving advice to householders on energy efficiency, and we’re now piloting whether that kind of advice can be provided on renewable energy, which includes solar water heating. I guess the issue that we have very much focused on is technologies with a payback of three to five years, whereas with solar water heating, it may be a bit longer. Perhaps the first thing is to have authoritative advice available to householders and there may be other things to do with grants that can help support them. John Butt: I would go one step further. I think that if you have, say, one of the Government buildings installed it they become a market adopter. Somebody has to take it on, let’s say, on a leasing arrangement with the overriding goal that it is seen to be working. Then that has a trickle down effect, hopefully. Chris Dunham: I’m not sure that the problem with solar water heating is finance. The payback is quite long compared with other technologies, so it’s persuading people to do it, and they have to be willing to put it on their houses for reasons other than financial ones. One of the things I’m interested in - I don’t know if you’re aware of the KPMG study, which looked at the cost-effectiveness of PV. They found that if somebody was willing to invest $500 million, which is the equivalent to 0.5% of current expenditure on oil and gas exploration, on a large manufacturing plant for PV, then that plant will be able to supply PV panels at a price that would be competitive with conventional power generation. Now, why doesn’t somebody do that? Why don’t you do that? Why can’t you join up with a PV manufacturer and just build that plant? John Butt: I think on that scale of plant, it’s a different kind of financing. Alistair is the one who would fund that. Alistair Perkins: If somebody came to us with that proposal, we may very well finance it. It’s just not coming forward. The Chair: I think I have heard that before. They’re not coming forward. I have heard that the entrepreneurs aren’t coming forward. David, do you have a handle on that? Are there sufficient people coming forward in the right packaged sense that John was talking about, presented with proper objectives? Is that really where the training needs to be? Dr David Vincent: I think there is certainly no shortage of people coming forward, certainly to The Carbon Trust, seeking carbon finance. There is a shortage in terms of the quality of propositions, not just in terms of how are you addressing the technological risk, but how are you addressing the downstream issues, because we are like a handmaiden to commercial reality. We’re not there as a long-term prop. The stories that we tend to get are promising technological ideas, but lacking in the vision that says, “This is going to have to displace conventional products with conventional IP”. The holders of that IP will not simply lie down and be walked over. They will respond and they will respond to all kinds of market and commercial mechanisms, that these poor people coming to us with technological ideas haven’t got a clue about. What is needed is a certain degree of education, in reality experience, that says, “Yes you have got a good product, but what do you see as your pathway to market and the barriers you will address?” We have to have a dialogue and a debate. Lots of people have come to us. Few people walk away with a cheque. And that’s not because we’re being mean; it’s because there’s no point in giving a cheque to overcome one barrier, if they haven’t addressed the others. Neil Wallis: I just want to make one general point about defining technologies and the issue of whether the Government should set technical choices. My view is the Government has a pretty poor history of not backing winners. The role of Government should be to define the goals, to set the targets, against which business and partnerships can deliver, rather than sending a message that by putting solar water heating on this building, that solar water heating is the way forward. You need to be telling people where we need to get by what time. Darren Johnson: I want to come back to this. Various people have talked about Britain’s record and what Britain needs to do. I’d just like to get more of an idea about what you see as our main strengths and our main weaknesses in Britain, compared to other countries. You talked about the expertise and the innovation. John Butt: A limited section of the broad act of green technologies. Let’s talk about the hydrogen economy. The hydrogen economy can divide into generation, storage and delivery of hydrogen, and that links into fuel sites. From that you can also bring in wind and solar, because to be quite honest, you need wind to run a wind plant, you need sun to run a solar plant. The challenge to be faced is you need to store it, and that is where the hydrogen economy comes through. On the option side, looking at the hydrogen economy, the UK is quite strong on the supply base. In actual fact you will see the UK supply base dominating outside of the UK. However, systems integration within the hydrogen economy sector is an area of weakness particularly on the technical side. On the corporate side, another weakness we see is the institutional building that’s required. The strength is the expertise and know-how. Darren Johnson: You mentioned inadequacy of funding earlier. Is that the main weakness, or do you think it is integrated with -- John Butt: It’s tied in with people recognising what the viability and the functionality are for a lot of these technologies. Funding could have a leveraging effect as the technology ceases to be exotic. UK funding however is a drop in the ocean when compared to North America and Germany where billions are being thrown into the sector. Alistair Perkins: From my own perspective as well, on renewable energy projects, in Germany and Denmark they’ve actually made a gamble and backed one particular or a number of technologies at the expense, probably, of others which remain less developed. Whether or not that’s advantageous down the road, I don’t know, but what it’s meant is that they’ve actually established a clear roadmap. They’ve got well-established Government-supported loan programmes of various technologies. On the tariff side, they’ve got fixed tariffs. There are incentives in place, which mean that they are cost- competitive with conventional technologies. That’s enabled the market to develop at a very rapid rate and has brought in a lot of private finance. That clear direction does not seem to be coming through in the UK. Darren Johnson: Do you think Britain is too cautious in not wanting to back a particular technology until it’s really taken off, by which time it’s -- Alistair Perkins: Or basket of technologies. There’s no real roadmap there to follow. That’s my perspective. And it’s the same with the planning process. It’s a very difficult task to get things through planning permission. The Chair: I would like to move on to what we’ve learned. I think the “where we’re at” is it’s very clear a strategy is required and the Mayoral strategies have given, by and large, some very good indications there. Also working together, I think that this Committee has been a very big fan of London working in concert and, therefore, we do need to know where all the funding is and that it ties in with our strategies. Obviously there’s a need for more money. And there’s certainly a need to look at how planning and the London Plan can fit in. We’ve got ideas around how we can support the European dimension - is that right, Graham? We need to think about how we can be very, very proactive in getting some strategic money into areas, and we’ll need to apply the Europe dimension. And the issue of tax incentives was raised very, very notably and loudly earlier on. Are there any other questions? John Rose: Just a few observations really on the basis of going along with the scheme over the last few years. It’s interesting that there does seem to be a gap in high risk funding although we’ve seen a number of projects which the landfill tax credit has been used to support. I sit on a grants committee completely unrelated with work and have noted there is a suspicion about any project that may result in financial gain for the person who is bringing it to the table. I think that could be a real barrier. I’ve seen some tremendously innovative projects come across the table there that are instantly greeted with a degree of suspicion, because ultimately that committee is involved in allocating what are public funds. I must say that’s a personal comment and not on behalf of ENTRUST. But I think that’s a significant barrier. There’s also - which may well come about as a result of the development of regional government - the need to marry up decentralised decisions, i.e. regional decisions with strategic projects. There is a need for national co-ordination as well as regional co- ordination and that’s certainly a criticism that’s come in from many of the funding bodies that work under the scheme - the lack of strategic direction. I think it’s important to tie the regional priorities in with national priorities in. Zoltan Zavody: I would like to end with what John Rose said about linking in regional with national. We very much welcome the targets suggested by the GLA for carbon reductions for London, the 20%, and also the 10% renewables for new developments. I guess what we’d like to see is where London boroughs, and indeed local authorities and other players around the country, see their role as contributing towards meeting a target, in this case the London target. I think Neil made a similar comment about technology; if you have a final target, then the various technologies will filter up to meet that target. You don’t need to pick a specific winner. We very much welcome that broad framework. Neil Wallis: I think it’s important to set targets, to have overriding aims that are clear with an appropriate mix of both sticks and carrots. I don’t think technology alone is going to solve the problem. In the context of London, the planning powers are perhaps a pretty important area to look at. Also a point that Zoltan raised earlier about public awareness - it’s vital that the public are aware of carbon footprinting and the link between what energy we use and the effect that’s having on climate change, flooding, and severe weather etc. Raising awareness will enable effective policy to be implemented and to gain widespread acceptance. I think that is an important factor. Dr David Vincent: I haven’t really got much to add. It’s really useful, though, to address the fact that there are huge technological barriers in risks, and commercial risks to achieving a green economy whether you’re in the energy area or in other areas of activity. I think trying to get to grips with that is a monumental task. We have to start segmenting those bits where we feel we could actually be material and effective, rather than trying to do everything across the board. Dr Bevis Watts: I think the only point to add is something I’ve tried to stress already. We’re trying to address issues which are very specific or acute in recycling and, within that, the segments of the green economy. Perhaps London’s focus should be on trying to identify what are London-specific issues, or where London has a potential to set a precedent for something that might roll out elsewhere. For that we’re very keen to supply the information and research we can to your process and thinking. The Chair: Thank you very much for coming. We will be writing to you with the reports. We’ll invite you all to the final session for discussion or we’ll present it to you. I hope that you keep in touch with our process. Thank you very much.
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