The banking crisis has restricted the availability of finance for low carbon investments such as renewables (specifically wind) and carbon-efficient vehicle manufacture; both of which require significant investment in the near to medium-term.

Challenges for investment in wind

• Project economics is the determining factor in whether a wind project secures finance. It has been affected in recent months with the depreciation of the Sterling, given that wind turbines are priced internationally. In addition, the lack of liquidity in financial markets has meant that independent wind developers - who depend on project finance as their main source of finance - have been particularly affected. Corporate finance is available, but this is usually restricted to large companies with access to the corporate bond market.
• Evidence from the British Wind Energy Association (BWEA) suggests that there are currently around 22 GW of projects at different stages of development, with up to around 7 GW which have planning approval. The implication is that at least a significant proportion of these projects are not proceeding to construction due to a lack of financing.

• Measures announced in by the Government in the Budget 2009 aimed to address the barriers to investment:
  • A temporary increase in the Renewable Obligation Certificate (ROC) multiple strengthened the project economics of offshore wind;
  • The European Investment Bank will provide an additional £4 billion of finance for energy projects (including renewables).
  • More recently DECC have announced details of an intermediated lending scheme to channel up to £1 billion of EIB funds targeted primarily to onshore wind projects, in cooperation with existing banks (RBS, Lloyds, BNP Paribas).

Whilst these are useful in easing near term financing constraints, there may be role for Government to provide comfort to lenders through mechanisms to reduce project risk. It must closely follow the market response to the EIB facility and consider interim mechanisms to provide comfort to banks (e.g. time-bound guarantees or partial risk guarantees) as appropriate, in order to encourage lending.

Difficult financial conditions for new renewable projects, and an overall reduced appetite for risk may not be a temporary feature as a result of the recession. At the current stage, therefore, future intervention should not be ruled out.

Challenges for investment in low carbon vehicle manufacture

There is an opportunity for the UK automotive industry to become a major producer of low-carbon vehicles; but it will need to ensure that it keeps pace with the development of technologies such as hybrid electric vehicles. However, the current financial situation of the vehicle industry (both in the UK and globally) may be a barrier to the significant investment required to support development of low carbon vehicles.

There have been some positive steps addressing these barriers – for example, up to £1.3 billion of European Investment Bank loans; and an additional £1 billion of loan guarantees for projects aimed at improving efficiency.

The creation of the a market for such vehicles may require both price support to cover cost premiums of early vehicles, and the development of charging infrastructure. Read more about strategies for encouraging the roll-out of electric cars.