Eco-investment: £2bn fund to boost green businesses

Government backing will unlock 'billions more' in private finance, says Darling

The Government is to create a £2bn Green Investment Bank to address the "equity gap" threatening investment in low-carbon infrastructure.

The scheme will be funded by £1bn from the sale of assets such as the Channel Tunnel rail link, and another £1bn from the private sector.

It will be open to all green infrastructure projects, but will focus on energy and transport projects in particular. Offshore wind is likely to be the most immediate priority, as Britain races to put up the £100bn-worth of offshore wind capacity needed to meet the 2020 carbon-reduction target. The Government is also putting up £60m for the development of ports hosting manufacturers of offshore wind turbines.

"This [green investment fund] equity will unlock billions more of finance from the private sector," Alistair Darling, the Chancellor, said. "The fund will focus first on investing in green transport and sustainable energy, in particular offshore windpower, where Britain is already the world leader."

Infrastructure UK, which is to run the fund, will publish a consultation on the proposed scheme this summer.

The proposal was welcomed by business, environmental organisations and renewable-energy lobbyists yesterday. But there was scepticism over whether a £2bn fund can make sufficient impact on the £400bn-worth of infrastructure spending needed over the next 10 years. Nick Chism, the head of global infrastructure at KPMG, said: "A long-term infrastructure investment strategy will have to include new and better ways of co-operation between the private and public sector."

Energy projects are such a focus because electricity is at the heart of plans to clean up heating and transport. Alongside the Green Investment Bank scheme, the Government also published a wider review of Britain's electricity market. The report offers a "clear direction of travel" for the reforms needed to secure the investments, said Ed Miliband, the Energy Secretary.

"The Energy Market Assessment is about incentives; the Green Investment Bank is about liquidity and risk," Mr Miliband said. "If we get the incentives right, there can still be issues about whether the private sector can come up with sufficient resources to invest, and that is where the Green Investment Bank can make a difference.

"The very fact that the Government is putting its weight behind low-carbon generation can make a big difference in terms of the willingness of the private sector to get involved," he said.

On the question of incentive mechanisms, the Energy Market Assessment ruled out two of the most extreme options mooted by Ofgem last month. It would not be advisable to rely solely on a floor under the carbon price to draw investment into green-generating capacity, the Government concluded. Nor, at the other extreme, would it be effective to set up a centralised electricity buyer to determine the amount and type of new generation.

Three approaches remain on the table, to be discussed with the industry with a view to producing a draft policy within six months. One option is to underpin future income from green investments, through the creation of low-carbon obligation requiring retail electricity suppliers to source a certain percentage from green generators, for example. Another is to introduce regulation to cap the amount of high-carbon generation that can be built. The third includes measures to guarantee a revenue stream from low-carbon energy that is independent from the price in the wholesale market.

The power industry breathed a sigh of relief yesterday that the more interventionist measures put forward by Ofgem were rejected in favour of market-based alternatives.

Dr Paul Golby, the chief executive of E.ON UK, said the proposals appear to be "eminently sensible". "It was always clear to us that a return to the 'command and control' approach was not the right way forward."

Sam Laidlaw, the chief executive of Centrica, said: "We welcome the idea of a UK mechanism to achieve higher carbon prices, following the principle that the polluter pays."

View from the marginals: 'Where will the cash go?'

Ben Williams, 33, Retail manager

Constituency: Derbyshire South

Labour majority in 2005: 4,495

Obviously the £2.5bn to support business is a good idea in principle, but it's a lot of money. I'd like to see how that will filter through. We were told nothing definite about that.

The increase in tax on alcohol and fuels was somewhat expected. We live in a drinking culture so there are health issues, but I get it in the ear from customers. It's expected that we pay for what we enjoy.

Scrapping stamp duty under £250,000 was a very good idea. I'd have liked to seen Mr Darling say more about education. We get a lot of antisocial behaviour here: discipline and after-school activities would help.

I voted Labour but I'm undecided. Nothing yet suggests I'd vote for them again, but equally, nothing from the Tories would make me change.