The coalition’s Green Investment Bank has been tasked with boosting private investment in the green economy – a high-potential sector constrained by limited finance. Winnie Agbonlahor meets chief executive Shaun Kingsbury.
It doesn’t happen often, but on rare occasions politicians of all political colours agree to do something – and then actually do it. One such instance has been the creation of the Green Investment Bank (GIB): an idea first put forward by Labour in 2010, and enacted six months ago by the coalition.
Most people accept that the country needs to become greener, and fast. Under the Climate Change Act, Britain must reduce its greenhouse gas emissions by 20% by 2020, against a 1990 baseline. And while the country’s emissions fell by 7% in 2011, much of this reduction was due to the mild winter, rising energy prices and falling real incomes. Only around 0.8 percentage points of the fall was due to the implementation of measures to reduce emissions, according to the Committee on Climate Change, an independent body set up to advise government on reducing greenhouse gas emissions – and that’s only a quarter of the rate required to meet future carbon budgets.
Hastening the decline in emissions will require a huge investment in renewable energy, fuel efficiency and other green technologies – yet investment into UK clean energy appears to have peaked at £7.5bn in 2009, according to Bloomberg statistics which put the figure last year at just £5.3bn.
To help boost private investment into the green economy, the government created the GIB. Its mission, according to chief executive Shaun Kingsbury, is “to accelerate the UK’s transition to a green economy and to create an enduring institution, operating independently of government”.
Established in May 2012, the GIB became fully operational in October. Kingsbury explains that the Edinburgh-based bank has a “double bottom line”, seeking a profit as well as following a green agenda. He adds: “This concept of a double bottom line is an interesting thing, because not many organisations have it. So a project has to be green and profitable – not just green and not profitable, or just profitable and not green.”
So, how does it work? The GIB was given £3bn of taxpayer’s money to assist domestic investment projects, and asked to spend 80% of its cash on four priority sectors: offshore wind; energy efficiency; waste to energy; and waste recycling.
Operating within the Department for Business, Innovation and Skills (BIS), its role is not to initiate major projects but to give large-scale privately-funded initiatives the boost necessary to get them off the ground. “We’re not going out leading transactions,” Kingsbury says. “What we’re waiting for is for people to bring us opportunities where there is a great project, a great team, a lot of the capital it needs, but it’s a little bit short. And that has been the case in the last few years, because of the financial crisis. In those situations we will invest, we will get that project across the line; bridge it effectively to successful financial close.”
The GIB’s additional support can come in different forms: “We can be in the capital structure, so we can be a debt provider along with other banks. We could be an equity provider, invest alongside the promoter of the project. We can provide guarantees. We can provide most things in finance, anywhere we like, as long as the return of that piece is adequate to counter the risk that we’re taking.” What the bank is not there to do, Kingsbury adds, is to hand out grants, or to offer loans with zero or below-market interest rates.
The challenges so far
Setting up a bank from scratch has been challenging, he says. “You have to first of all hire an entire team, so we now have 75 people: about 45 here in London, and about 30 in Edinburgh. You have to find all the right skill sets; you have to focus on getting the right culture; and then you’ve got to build up all your systems, processes and risk controls that any bank would have – from scratch. It’s incredibly busy and a lot of fun.”
So what is the desired culture, and what has Kingsbury done to achieve it? “We need a collaborative culture,” he says, “because our job is to partner with people to catalyse that other private sector investment. We need to develop a culture of working together with the industry; so while we are very focussed on making money as well as making our green bottom line, we have to do that with a style that makes us a good partner for everybody.”
To get his team to work according to this ethos, Kingsbury says, communication and openness is key. “Lots of time is spent talking about transactions and how to approach them. We’ve also been asking members of the team to spend some time on defining their values for the bank, and making sure that they have a chance to talk about what they’d like to see as well as just us installing it from the top. For me, being very open and direct is very important.”
Another challenge has been completing the first tranche of deals: attracting private sector investment in a difficult economic and political climate. Many banks are currently unwilling to commit to long-term projects, says Kingsbury, because they want to maintain short-term liquidity. But, he adds, “of course that’s one of the reasons the GIB was created in the first place: to fill that gap. We’re concerned private investment into the green economy has slowed down, but it’s one of the reasons we’re here and we’ll do what we can to help stimulate that kind of investment in the UK.”
The bank that can’t borrow
One of the biggest concerns environmental campaigners and economists have raised regarding the bank is its inability to borrow money against its assets – something that would dramatically boost its spending power. But despite calls from campaigners, opposition ministers and economists for the GIB to be allowed to borrow, the government has maintained that the bank will only be allowed to do so once the coalition has delivered on its debt reduction targets.
Both business secretary Vince Cable and Kingsbury have paid a visit to the German state-owned development bank KfW, which has similar objectives to the GIB. But the German bank has half a trillion euros of assets – roughly twice as much as the World Bank. It borrows huge amounts on the capital markets, and about a third of its investments go into energy and climate change projects – including €24bn (£20.4bn) on energy efficiency in homes in 2009-11, leveraging in a total investment of €58bn (£49.3bn). Green campaigners fear that, by comparison with its German peer, the GIB is disappointingly underfunded.
Kingsbury plays down their concerns and says his main focus is building a successful organisation, which will eventually lead to a variety of funding streams becoming available. He was last month reported to have told the Guardian that “access to debt markets will come”, but tells CSW he can’t say when this might happen or how strong its borrowing powers might be.
“We don’t know the answer, and there is no point making one up,” he says. “My focus is on building a successful organisation that knows how to invest – because if we do that, there are lots of different ways to raise capital. Borrowing money is one of those ways, but not the only way.”
The biomass debate
The millions invested by the bank so far have gone to projects built around the government’s Green Deal energy efficiency scheme, as well as several waste and biomass initiatives with the potential to catalyse around £1.7bn of third party investment.
One recent investment includes a £100m commitment towards a £700m project to convert three of the six plants at the Drax power station in North Yorkshire to greener biomass fuels. The 4000MW plant is Britain’s biggest power station, supplying 7% of the UK’s electricity needs. Instead of coal, the converted plants will burn wood chips – but while biomass is classed as a form of renewable energy, environmental campaigners have raised concerns about the sustainability of the wood. This, as Kingsbury tells CSW, is to be shipped in from the United States or Canada. But would shipping biomass across the ocean not undermine the scheme’s green credentials? “The ships are very efficient,” Kingsbury replies. “And the trees would have been chopped down for the paper and pulp industry anyway, so the branches and trimmings would have been wasted.”
To ensure the biomass is in fact sourced from material that would otherwise have gone to waste and that new trees are being planted – to check, says Kingsbury, that “we’re not cutting down new forests to substitute something which looks green here but causes a problem somewhere else” – the GIB employs an auditor to scrutinise the whole of the supply chain and carbon cycle. “The trees are re-planted, they grow, absorb more CO2, we’re taking coal off the system – that’s the benefit,” he adds.
Green campaigners would like to see the GIB setting out a robust policy explaining exactly how it satisfies itself that a project is green enough. But Kingsbury says creating policies does not lie within the bank’s remit: the GIB acts independently, but according to policy parameters set out by the government.
“We don’t set policy on whether biomass is green or otherwise – that’s the role of DECC. Our role is to make good investments,” he says. The bank’s “green purposes” are defined in the Enterprise and Regulatory Reform Act, which points to five criteria: “the reduction of greenhouse gas emissions; the advancement of efficiency in the use of natural resources; the protection or enhancement of the natural environment; the protection or enhancement of biodiversity; and the promotion of environmental sustainability.” But how do you define which of these five should take priority? “We do it on a case-by-case basis,” Kingsbury says.
How to make the future greener?
The GIB has invested an impressive £635m in less than six months, but its ability to build on that success may depend on events beyond its control. Many commentators fear that changes and retreats in the government’s sustainability and energy policies are undermining potential investors’ confidence in green business opportunities – for investors, above all, hate uncertainty. Kingsbury, though, is not in a position to guarantee that coalition policies aren’t going to shift again in future, potentially damaging the business case for green projects. “There are changes in things like planning laws in every country; it’s a natural process,” he says. “But the UK government is tremendous for our core investment community at sticking to what it said.” New laws and policies aren’t applied retrospectively, he argues, with projects “grandfathered” so that they continue under the regime in place when they were established: “So when you make that big capital investment, you have a great deal of certainty that what you’ve been offered is what you’ll get – and that makes the UK an attractive market for investors.”
Another way to give investors reassurance, green groups have said, would be to introduce a decarbonisation target for the energy sector for 2030 – a recommendation of the Committee on Climate Change, subsequently backed by energy and climate change select committee chair Tim Yeo. But while the Scottish government has adopted this approach, ministers in London voted against it. Kingsbury says a 2030 target would be “an interesting signpost – something that would give the industry more comfort”, but adds: “The key issue is to get the energy market reviewed and get the energy market reform process right.”
Kingsbury is referring to the Energy Bill, which recently passed its third reading in Parliament. The most important aspect of the Bill, he adds, is its introduction of a ‘strike price’, setting minimum levels of compensation for developers who provide energy. “I think we need to get the strike price right – that’s absolute key – and set it at a level so that people can make an adequate return for the risk, so they feel comfortable that they can commit and the project finance can commit to get things built,” he says. “You build a wind farm. You don’t actually have a lot of cost running it because it runs off the wind, so the real money you invest is not during the life of that project; it’s all upfront. And once you’ve built it, you’re really committed. You can’t pick up your wind turbine and go somewhere else. So the thing you’re looking for is a focus on that revenue line and certainty.”
The government has delayed publication of strike prices a number of times, but Kingsbury is hopeful things will progress significantly before the end of the summer. “People are waiting to make investments right now,” he says.
Parties of all colours may have got together to set up the GIB, but – in the energy field, at least – its success will depend on government’s ability to agree a strike price regime which gives investors a good reason to put their money into a new generation of renewable energy technologies.