Picking winners

EBM talks to the David Vincent and Tom Delay of the Carbon Trust about the Low Carbon Innovation Programme, which they hope will help usher in the low-carbon economy

The nuclear dinosaur is dying. Coal and gas-fired generation have problems too – the UK is loath to rely on imports from unstable regions for its energy supply, and both government and the public have accepted that the threat of climate change is real.

Kyoto commitments, ambitious Labour aspirations and EC directives should all be working in renewable energy’s favour. But effecting radical change is never simple.

Even without the ever-present regulatory and technical problems, developing innovative technologies requires cash, and that cash must come from an investor base that is looking for a fast return and is unwilling to take risks on unproven projects.

Into the fray steps the Carbon Trust, the independent, not-for-profit company set up by the government, with support from business, to “take the lead on low carbon technology and innovation in this country, and put Britain in the lead internationally”, in the words of prime minister Tony Blair.

Lofty aims

“The Carbon Trust’s aim is to accelerate the transition to a low carbon economy,” says chief executive Tom Delay. “It is a big, ambitious, very long-term aim, and in reality we can only hope to have a marginal impact.”

Delay’s statement is cautious, but the Trust will definitely be having a £75m impact over the next three years through the Low Carbon Innovation Programme. This figure is impressive, but pales in comparison to the massive amounts required to take emerging energy technologies from development through demonstration to commercialisation.

The gap between the scope of the Trust’s remit and the reality of its resources led swiftly to the realisation that any attempt to be even-handed would fail. This reality is at the heart of the Low Carbon Technology Assessment, which identifies those areas where the levels of investment it can offer will make a real difference.

“If we didn’t do this work we would always be asking ourselves: Do we try and be even-handed?” Delay says. “We knew that wasn’t feasible, simply by taking the amount of money we have to invest and dividing it by the number of potential areas of interest.”

By taking 49 low-carbon technologies and assessing them in terms of their potential to reduce carbon emissions at a competitive cost in the short and long term; the risks of investment; the impact of funding on speed of development and take-up; and less commercial concerns such as the scope to help the UK’s knowledge base along, the Trust has effectively ranked low-carbon technologies (see table).

“We are going head-on into the debate as to whether you can or should pick winners. That is what this is all about,” Delay says.

Investors’ view

Robin Batchelor, fund manager of the New Energy Technology Investment Trust at investment bank Merrill Lynch, says: “We agree on the technologies. I commend them on the analysis and agree with what I see there – it dovetails with a lot of our own thinking.”

But is picking winners the correct role for public money? Should the Trust’s focus be on assisting technologies that have great potential, but are too risky for private investors to touch? And does Batchelor’s praise suggest the assessment intended to help the Trust achieve low-risk carbon reductions has led it to mirror the actions of the City?

Delay disagrees. “If we felt there was significant private investment going into biomass, CHP, building energy efficiency, fuel cells, hydrogen, I’d buy that argument. The reality is that the private sector is investing pretty sparsely in those areas.”

Simon Baker, lead fund manager of Jupiter’s Green Fund, says: “We are putting money in renewables, but not nearly as much as we did a couple of years ago. At the moment the market does not like stocks that don’t make profits, or highly rated companies, and that basically covers all the alternative energy stocks. Until those forward-looking companies come back into favour, it is a dangerous strategy to have too much invested in the area.”

Batchelor agrees that investment in renewables has taken a dip. “The stock market has fallen through the floor,” he says. “We have entered a major bear market – the worst this century – and that has reduced the amount of money people have to invest and changed their attitude to risk. To invest in this sector you need to take some risks.”

Reducing the risk

Taking action which results in those risks appearing more palatable to the private sector will be the true measure of the programme’s success, and it is the Carbon Trust’s primary focus – carbon rather than financial returns – that will enable action. David Vincent, the Trust’s technology director, says: “Our role is to bridge the gap where a conventional funding institution would say it was not interested in a technology because it could not see a return in two to three years.”

The programme will fund research and development, pilot and demonstration schemes, market diffusion, delivery mechanisms, infrastructure projects, education and training. In particular, demonstration projects will play a key role, Delay says. “The investment community is cautious and understandably so. But what we need to do more than anything else is to bring a lot of private investment into the sector, and demonstration is a good way of doing that.

“Where there are risks is not a bad place for public funding to play a role, because overcoming uncertainty is one of the things we can do.”

Encouraging investment

The Trust’s approach is similar to that of a typical business – investment decisions will be made that reflect its funds and resources, and like any investor, it’s primary goal is a low-risk return – albeit a carbon rather than a monetary one.

Vincent hopes that this alone will help the developers of emerging technologies gain experience in presenting their proposals when they do come to face the private sector. “We – along with other public funding bodies we have talked to – have come across problems where the poor quality of proposals limits the ability of fund holders to invest,” he says.

Delay attributes this issue to the grant-based nature of R&D funding in Europe. “We are acting like a city investor, and simply by sitting down with companies and explaining to them how an investor would look at the investment, we have been able to sharpen up their act,” he says.

“Even though we are a publicly funded body, the fact that we can act as a pseudo-private investor, but with a slightly friendlier face, means we can help businesses present their concept to the business community a lot more convincingly that they would have done.”

Making a difference

This alone should have a positive impact on the UK’s progress in stimulating emerging technologies, and Batchelor says he has “nothing but praise” for the Carbon Trust. “We need a framework that is supportive of early-stage technologies,” he says. “However, government then needs to step back, let the market take its course and let the technology advance.” Through the Low Carbon Innovation Programme, the Carbon Trust has the opportunity to do just that. Investment will be focused on reducing carbon emissions, yet grounded in market reality.

It is a pragmatic, practical approach, and both Delay and Vincent admit there will be bad bets, and that some technologies will be left on the roadside in the race for a zero-carbon economy. But overall, they are sure it will be a success. And anyway, as Delay says, “the market is pretty good at sorting out what is rational”.

Further information: www.thecarbontrust.co.uk

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