Birth of a green bank
The Green Investment Bank is meant to kickstart the transition to a low-carbon economy. But will it be allowed to borrow enough?
- Published in Features.
The new GIB will operate at arm’s length from the government
By the end of the year there will be another new bank in the UK. But this won’t be a bank that will fiddle the Libor rate, mis-sell payment protection products or buy bad debt. It will be the country’s first public bank. And it will be the world’s first bank dedicated to greening the economy.
Public banks are nothing new – many countries in the developed world have had them for decades. But here in the UK twitchy civil servants nervous of losing control of public finances have so far managed to keep them at bay.
Now, huge investments are needed to meet the challenges of transforming the electricity sector to meet emission reduction targets and secure supply. The government cannot stump up the necessary funds alone. So the idea is that the public bank will invest in low-carbon projects to kickstart the industry.
Coal-fired power plants will soon be closing and new nuclear stations will not be up and running until the end of the decade at the earliest, leaving a gap in supply that will be plugged with renewables. Charles Hendry, minister at the Department for Energy and Climate Change, says: “We constantly measure how much spare supply there is over demand and, as we move into the second part of this decade, it is getting a bit too tight. As we move into 2020 it’s very tight.” He adds that the UK needs to invest £100 billion in the low-carbon sector to meet future electricity needs.
Private banks are under pressure from regulators, shareholders and the government to take fewer risks in the aftermath of the financial crisis. This has caused them to pull back on long-term investments such as infrastructure projects, according to Ian Noble, development director of UK Green Investments at the Department for Business, Innovation and Skills. The plan is that, once the new bank has made investments from the public purse, private investors will find these projects less risky and will be more willing to get on board. So the Green Investment Bank (GIB), as it will be known, will help to accelerate investment in the infrastructure needed for a low-carbon economy.
Once up and running, the bank will operate at arm’s length from the government and be funded to the tune of £3 billion between 2012 and 2015. The government believes that this initial £3 billion will attract a further £15 billion from private banks, giving a total investment of £18 billion by 2015.
The scheme is waiting for the state-aid approval from the European Commission that will enable it to function as a bank. That is expected to come in the autumn. But since April, a precursor team working under the banner of Green Investments UK has begun to invest some of the scheme’s capital in projects that will transfer to the bank in due course.
Investments will be made in these priority sectors: offshore wind, commercial and industrial waste, energy from waste, and non-domestic energy efficiency. Noble says: “The priority sectors are very important to the government meeting its renewable and sustainability targets, but they are difficult to finance at the best of times, let alone in the current state of the capital markets.”
By pumping money from the GIB into these sectors it is hoped that they will soon be seen as mainstream investment opportunities. But the money is not enough to solve all the problems of financing these projects, and the GIB will not be simply taking on risks that no one else will touch.
Noble says that the fund will be protected and managed in a similar way to the endowment of the Wellcome Trust, a charitable foundation that has supported medical research for 75 years, or those of Yale and Harvard Universities, which are designed to fund the institutions in perpetuity. Part of the strategy for the GIB is to create a long-lasting institution.
The bank will steer clear of investing in sectors that are less developed, such as marine and tidal power, and carbon capture and storage. Even though these sectors may play an important part in the green economy in the future, the bank will not get involved in research and development projects, or the demonstration stages of renewable technology schemes. Noble says: “Our mandate is an infrastructure fill mandate, it’s not a venture capital mandate.”