The Cities Commission for Climate Investment (3Ci) is developing blended finance structures to help UK cities attract up to £500bn of private investment to meet net-zero targets.
3Ci is seeking to raise “place-based” financing to create net-zero neighbourhoods at a local and regional level to help UK councils decarbonise and is prioritising retrofitting the UK’s 28 million homes and up to 3 million commercial properties to improve energy efficiency and cut emissions.
The blended finance structure has been modelled as short and long-term loans with possible equity layers. It could also be used for other projects including renewable energy, sustainable transport, circular waste management and green spaces and waterways.
“Most net-zero transition [financing] looks a bit like a loan or a bond – fundamentally you have a big chunk of upfront capital required to make an effective transition and then you have an annuity stream of benefits that flow from it,” said Greg Clark, chair of 3Ci, a local government and private sector group.
3Ci was founded by Connected Places Catapult, Core Cities UK and London Councils and is supported by the Department for Business, Energy and Industrial Strategy and the Local Government Association. It is part of the government-funded Catapault Network that was set up by Innovate UK.
It is aiming to raise financing at scale for cities including London, Belfast, Birmingham, Bristol, Cardiff, Glasgow, Leeds, Liverpool, Manchester, Newcastle, Nottingham and Sheffield.
3Ci has 1,000 projects in its "national net-zero pipeline" and is targeting 5,000 projects from 100 cities and creating pilot projects to test the financing frameworks.
Two-step funding
The financing will comprise two to four-year loans from a development bank such as the UK Infrastructure Bank at a higher rate to cover installation costs followed by longer-term institutional loans of up to 40 years.
“We’ve modelled it as a 40-year loan paid back on a lower premium to the bank rate. There’s a live conversation about whether you might have an equity layer in there,” said Rufus Grantham at Bankers Without Boundaries, a non-profit group that is working with 3Ci to build business cases and funding.
The funding will be aggregated under the place-based approach as parcels of properties are retrofitted, which could cut the installation costs by up to 20%. The energy cost savings that are generated will be shared between funding vehicles and residents to lower energy bills and create investment returns.
“We’re creating a vehicle that is going to borrow long-term money on the strength of long-term contracts for that entity to capture the energy saving,” Grantham said.
Development bank financing will be required initially, along with government funding, as subsidies will be necessary to reach net-zero housing, but this could be replaced by long-term institutional money from pension funds and insurance companies as the market matures.
“We are talking to a large number of financial institutions about providing that private sector component in place of a development bank,” Clark said.
Many of the projects will create social co-benefits, such as training and employment, and decarbonisation could drive more local economic development and regeneration. Carbon offset schemes could also be created in terms of avoided emissions, but offsetting remains controversial and difficult to prove and structure.
Retrofitting crucial
Retrofitting is crucial to help councils meet their net-zero targets. West Midlands Combined Authority is aiming to reach net-zero emissions by 2041, for example, but needs to retrofit more than 294,000 homes by 2026 to meet its targets.
The Climate Change Committee has estimated that it will cost £360bn to ensure all homes and buildings are in line with legally binding net-zero obligations by 2050 and private finance will be critical to reach this target.
Although councils can raise money cheaply from central government through the Public Works Loan Board and the UK Infrastructure Bank, billions of pounds in capital costs for each council far exceed any public finance budgets and longer timescales do not work for local government financing models.
“You could make the argument that the UK should do an enormous green Gilt and fund the retrofit that way, but the problem is that is about £1trn, which is a huge spend that’s required nationally across the UK,” Grantham said.
Creating a viable funding and delivery model is therefore vital to build low-carbon communities and complete the 23,000 deep retrofits that are needed each week for the next two decades to decarbonise the UK housing stock.
The Green Finance Institute and climate think-tank E3G also published recommendations in October to spur private investment with the help of Santander, NatWest and Nationwide, and called for certainty on net-zero policies and incentives for homeowners to improve energy efficiency.