The UK government is to introduce legislation in the coming year to establish its long-planned Green Investment Bank (GIB), but investors and environmentalists have called for clarity over how it will be funded.

In the Queen’s speech today, in which the UK’s monarch sets out her government’s legislative plans for the next 12 months, Queen Elizabeth announced that “my government will introduce legislation to establish a Green Investment Bank,” without elaborating.

“It is good news that the purpose and independence of the Green Investment Bank will be enshrined in legislation,” said Penny Shepherd, chief executive of the UK Sustainable Investment and Finance Association (UKSIF), a member of GIB advisory panel. “This will reassure investors that it will become a lasting institution and not merely another short-lived government investment fund.”

“However, the legislation needs to include a strong commitment to enabling the Green Investment Bank to scale up by borrowing from the capital markets,” she added.

Andrew Raingold, executive director of the Aldersgate pressure group, added that: “Powers to borrow must be enshrined in legislation, for the institution to maximise its potential to benefit the economy and provide certainty to investors.”

“This is a positive step after two years of lack of direction on the environment and the low-carbon economy – but we need more details on the government’s funding commitments,” agreed Mark Kenber, chief executive of The Climate Group, a business-orientated environmental NGO. “It needs to be backed with real money if we are to take full advantage of the benefits of a clean economy in terms of new jobs and enhanced energy security.”

The GIB is funded up to 2015 with £3 billion ($4.9 billion) in government money, and is due to begin operating later this year, pending state aid approvals from the EU. It is designed to accelerate private investment in the UK’s green economy, initially in offshore wind farms, waste processing and recycling, and domestic and industrial energy efficiency.

It is expected to have full borrowing powers from 2015, subject to public sector net debt falling as a percentage of GDP (which is now not expected by the government until the 2015-16 financial year).

The Queen also announced plans to introduce legislation to reform the electricity markets, “to deliver secure, clean and affordable electricity and ensure prices are fair”.

A key component of planned reforms would be the introduction of a ‘contracts for difference’ (CFD) system, whereby operators of low-carbon electricity generation – including nuclear power plants as well as large-scale renewables – would receive a top-up if wholesale power prices were below their cost of generation, plus an agreed margin.

The proposed Energy Bill “is designed to provide investors with long-term certainty and incentives to invest in low carbon,” a spokeswoman for the Department of Energy and Climate Change said. It “would reform the electricity market to keep the lights on and emissions down in a more cost-effective way.”

She added that the legislation is set to reach the statute book next year, with it supporting low-carbon projects from 2014.

The CFD system would replace the existing Renewables Obligation support mechanism from 2017, said Gordon Edge, director of policy at lobby group RenewableUK. “2017 is only a short time away in terms of investment decisions, so we hope that the next update, expected later this month, will provide more detail around how the system will work in practice to ensure delivery.”

By Mark Nicholls
Environmental Finance