Overview

Decarbonising the global electricity supply should be a top priority when tackling climate change – not only because is it a major source of emissions, but also because it’s the key to decarbonising heat and transport, two other large emissions sources.

We have mature renewable technologies to do that, but what we lack is large-scale investment to make it a reality. In a time of economic uncertainty, the question therefore becomes, how do you raise large volumes of capital to invest in clean energy?

We think the answer is in Energy bonds.

Energy bonds would: provide a safe, secure investment to investors, with healthy returns; help bring down the cost of renewable energy; create jobs; protect investors against rising electricity prices; front-load investment in climate and energy security and foster significant national support for renewable energy.

They would be attractive both to individuals and to larger institutional investors looking for a secure, long-term investment.

How would they work?

Presented as one of 20 innovative climate change solutions at the 2009 Manchester Report.

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People could buy bonds over the internet or over a Post Office counter, investing anything from £10 to £10,000 – with pension fund managers likely to invest millions.

But instead of buying a piece of paper, you’ll actually be investing in real assets, wind farms, wave machines or solar panels. You’ll be buying watts, kilowatts, or even megawatts of generating capacity.

For example, at present, 1kW of offshore wind would cost around £3,000 and generate around 3,300kWh per year – so if you wanted to cover your entire electricity usage, you might spend £6,000 on bonds.

There could be two types of bond:

1. The first type would be a interest-bearing bond – which pays a quarterly dividend, once the renewable installation is running. These quarterly returns are tied to the sale of electricity.
2. The second type would be what’s called a zero-coupon bond, similar to many existing gilts, or Government bonds which are invested for a set period (say 10, 20 or 30 years) and pay out on maturity, having grown over that period.

All the money invested would be placed in a trust dedicated to financing renewable energy, we might call it the LIFE fund: the Long-term Investment Fund for Energy. The money in the fund would finance loans to renewable energy developers; or in countries with a nationalised energy industry, direct investments in the projects themselves.

The investment is backed by Government, which – since it is investing in real assets, with a secure return from sales of energy – can safely guarantee repayment. The Renewables Obligation, forthcoming feed-in tariffs, and a long-term Government commitment to renewables will serve to make this investment even more secure.

The fund could also facilitate community-based renewables, by allowing groups to buy Bonds that specifically finance projects in their own locality. An example of this already happening in practice is with the group Low Carbon West Oxford. They’ve set up a scheme which allows neighbours to pool their money and buy shares in community microgeneration schemes – a wind turbine at a school, a hydroelectric project on their local river and solar panels in an industrial estate.

Your exact return will depend on the price the developer obtains for the electricity generated. Also, if the wind blows a little less or more, or there’s an unusual amount of maintenance downtime, returns will vary. But based on existing electricity prices, existing renewable policy and average load factors the bond holder could expect high single-digit returns on their investment: somewhere between 5-9%.

Banks and venture capitalists have invested in renewables when they could see short-term profits of 15-20% and more. Today these pots of money have dried up, and the likes of BP and Shell have pulled their investments out of the UK. However, pension funds and individual savings – ‘patient capital’ – is ideally suited to the low-risk steady returns that renewables can deliver over the long term.

Bonds and renewable energy are ideally suited to each other because they share the same characteristics of an upfront investment with secure long term returns.

What are the benefits?

Benefits

Safe, secure investment with healthy returns. Energy Bonds could be a way of helping people fund their currently indequate pension pots, and provide better returns on savings at a time of historically low interest rates.

Helps bring down the cost of renewables through lower-cost finance for companies, and economies-of-scale.

Protects investors against high electricity prices. With fossil fuel energy increasingly affected by price volatility and carbon pricing, this represents a much lower-risk long-term investment.

Fosters national support for renewable energy by allowing people to share in the profits of repowering Britain. During the Second World War, the British Government galvanized support by issuing War Bonds – involving people directly in the goal of winning the war. Today, a similar mobilisation is needed to build a new clean energy infrastructure.

Creates jobs by financing infrastructure projects which require significant amounts of skilled labour, in building and running wind, wave and tidal farms, Energy Bonds would help boost employment in the UK)

Front-loads investment for climate safety (As the Stern Report showed us – it pays to invest now rather than incur bigger costs later. Bonds are all about an upfront investment with longer-term returns.)

How much could they reduce carbon emissions?

Carbon Saving

How much carbon the scheme saves depends on how much renewable energy is built, which depends on how much money is invested in the first place.

If we just consider a UK example, and take some current investment figures:

• Last year we invested £8.5 billion in Premium Bonds. (Total £35 billion).
• Last year we invested £14 billion in ISAs (Total 220 billion. 24% of British households have ISAs).
• Private sector pension fund contributions last year topped £80 billion.

Significantly, after a period of economic downturn, savings are now at an all time high. Energy Bonds are an ideal way to invest those savings in climate, energy and economic security.

Out of the billions of pounds that we save each year, if you assume Energy Bonds attract £3bn of investment in their first year (that’s 1 million households investing £3,000), at current deployment costs that would get you 1GW of offshore wind, which would save around 3 million tonnes of CO2 every year for the lifetime of the turbines.

If that sounds modest, remember that’s just one year’s worth of investment, and only in one country. Energy Bonds that reinvest their returns will compound. Furthermore, every year deployment costs would come down, and awareness of the scheme would increase, so we could expect a lot more over time.

And this is only a UK example, there’s no reason why Energy Bonds wouldn’t be adopted by other countries, as a way of promoting renewable energy deployment.

Who else is talking about this idea?

Presentation

Links

Since we first discussed the concept of energy bonds in our Climate Safety report in 2008, many other groups have proposed bonds as a means to financing renewable energy and indeed other mitigation technologies. Here, we put together a list of the proposals we’ve found, if you’d like to suggest more email us.

• Guardian Coverage
• Third Way, US Think Tank
• James Cameron of Climate Change Capital