Isra-Mart srl:Chris Huhne admits green bank may be scaled back

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The government's environmental bank looks likely to be scaled back and may begin life as a fund, jeopardising billions of pounds of badly needed loans to green technology. The green investment bank (GIB) was devised by George Osborne, the chancellor, when he was in opposition. He believed that it was crucial to the development of green energy projects such as clean coal plants and offshore windfarms in Britain.

Now the cabinet minister who is in charge of seeing it come to fruition and is a devoted ambassador for the idea of a fully functioning bank has floated the possibility of staggering its introduction. This would see it initially set up as a more limited fund unable to raise finance by issuing "green bonds" to back projects.

Chris Huhne, the energy and climate change secretary, appears to concede that the Treasury's concern that the liabilities taken on by a GIB would be added to the government's budget book. He suggests instead that the new institution could morph into a bank able to raise finance over time as Britain's deficit is reduced.

In an interview with the Guardian, he insisted that the government remained committed to setting up a bank and that setting up a fund initially was only one option. But the prospect of a delay on fully implementing this key green policy will anger environmentalists.

Huge task

"Obviously, if we were to turn around and have the GIB borrowing vast amounts of money tomorrow I can understand that managers of the national debt would be a little alarmed," he said. "I am absolutely at one with the Treasury on the need to make sure our fiscal credibility is completely re-established. The key issue is whether or not having established our fiscal credibility, what then happens?

"There are phasing issues, there are transition issues. What is the point at which maybe it begins as a fund and later is a bank, whatever. Let there be no doubt that the first overwhelming priority of the government has to be to get the deficit down."

Auditor Ernst & Young has said that, without a bank, only about a fifth of the £450bn investment needed for Britain to meet its carbon emissions targets over the next 15 years would be made.

Tomorrow Huhne will announce other measures which, he says, will amount to the biggest change to the electricity market since privatisation in the 1980s. Despite its apparent rethink on the GIB, the government hopes the measures will channel private sector investment into renewables in other ways. Huhne's plan will also break a key Conservative pre-election pledge on cleaning up coal plants.

In a key note speech to environmentalists in October last year, David Cameron repeated his party's pledge to introduce rules requiring new power stations to be as clean as a modern gas plant. This would have required energy companies to fit experimental equipment, which captures and stores carbon emissions (CCS), to about two-thirds of their new coal plants. But the policies to be unveiled are expected to recommend that CCS be fitted to only one-third of coal plants.

Huhne declined to comment on the specifics, but was much more effusive about Tesco, particularly when it comes to the environment. Tomorrow, Huhne will, by his own admission (albeit with tongue firmly in cheek), ape Britain's biggest supermarket when he promises that his plan will make Britain "greener for less". Huhne will promise that electricity bills will be lower and power plants twice as green as would be the case under the existing energy policies inherited from the previous government. "[It will be] greener for less, more for less," he said. Told that it sounded a bit like a Tesco promotion, he said: "I am very happy to be the Tesco of the energy industry." With the coalition government committed to both slashing the deficit and being the "greenest ever", it's a fitting slogan.

The power sector accounts for about a third of Britain's carbon emissions, so cleaning it up is crucial for the country to meet its climate change targets. The task is huge - and it won't come cheap, whether it is done with Tesco-style efficiency or not. Old coal and nuclear plants are being closed and must be replaced. The UK's electricity grids will have to be massively upgraded to cope with more intermittent supplies of electricity from wind farms. New flexible gas plants are needed in reserve to come online when the wind does not blow enough. Overall electricity demand is set to increase too, as electric vehicles become more common.

Ofgem, the energy regulator, estimates that £200bn of investment is required in new energy technology over the next decade alone, about double the normal rate of investment. But the existing market regime will not do the job. Some of the technologies are relatively new and untested on a large scale, making them risky for investors. Electricity prices are also volatile, which means the return on huge upfront investments is uncertain.

Huhne's plan is aimed at incentivising investment in cleaner ways of generating electricity. For example a carbon floor price - effectively a tax on carbon emissions - will be introduced which should make coal and gas plants more expensive to operate and renewables more competitive. Large offshore wind farms will earn a guaranteed premium above the market rate for all or some of the electricity they sell. Standby gas plants will also receive fixed payments in return for being available.

Higher bills

The cost will ultimately be borne by consumers through higher energy bills. Huhne will claim that his reforms will make electricity bills slightly cheaper than they would be under the current system. He may be right, but energy bills are still expected to increase by about a quarter over the next decade, and that assumes homes have been properly insulated. Ofgem's worst prediction sees prices rocketing by 60 per cent by 2015.

Gas and electricity prices are already close to record levels after a recent round of rises, which coincide with the coldest December for decades. Huhne argues that over the long-run, bills would be "substantially" higher if the UK relied on fossil fuels as their cost is rising.

"The name of the game is not adding to any British consumer's cost, but is actually making sure that British consumers over the long-term have an energy policy less vulnerable to the variability of what is going to be a pretty rough and tumble oil and gas market ...And if we have a relatively high fossil fuel price they [consumers] are going to be quids in." Promising higher bills in the short-term to head off even higher bills 20 years from now is a tough sell at the best of times, let alone during an age of austerity. Huhne insists he can pull off the trick of both greening the UK - and keeping the costs down for Osborne and the British consumer.

"Fiscal credibility is key. But we also have to decarbonise the economy. Governments by definition do not have one objective. We are able to walk and chew gum at the same time. Therefore we are able to have low carbon investment and fiscal credibility. That is what we have to combine and that is what we're going to do."