The GIB: investing in a greener future

As government moves to sell its stake in the Green Investment Bank, Nigel Hawkins assesses the institution’s achievements to date and its future in a world of diminishing renewables subsidies.

The Edinburgh-based Green Investment Bank (GIB) was founded – to widespread political acclaim – in 2012. It was seen as being fundamental to delivering much of the green agenda.

With its exclusively green focus, the GIB was the first institution of its type in the world. It was launched with initial capital of £3.8 billion from public funds and the GIB’s chief executive, Shaun Kingsbury, was clear from the start that the bank would stick to a firm guiding principle, namely to “build a profitable and green business”.

“We are not green activists,” he said. “We are investors and we are there to make a return in the green market.”

Since 2012, significant progress has been made. The GIB recently released its annual results for 2014/15, showing a small profit for the second half-year, a financial improvement which has given rise to speculation about the GIB’s future ownership.

As Kingsbury confirmed: “At the moment, we are 100 per cent public-owned; I hope to move to a position of raising private capital and we are publicly and privately owned – some kind of mixed model.”

In June, the secretary of state for Business, Innovation and Skills (Bis), Sajid Javid, went further and indicated that the sale of a majority stake in the GIB to the private sector was under consideration.

The GIB’s executive team includes some utility big-hitters. Its chairman is Lord Smith of Kelvin, a former SSE chairman, while David Nish, outgoing chief executive of Standard Life and one-time finance director of Scottish Power, is a non-executive director. Kingsbury himself has had stints at both Shell and Centrica.

Currently, the GIB has just over 100 employees, making it a comparatively small organisation. As an investor in green projects, it focuses on four specific areas, by far the most important of which – in financial terms – is offshore wind projects.

Its three other core activities are the promotion of energy efficiency, especially in the NHS; waste/bioenergy investments; and ­biomass projects.

To date, the GIB has invested c£2 billion in 50 projects, with a total value of more than £8 billion. Undoubtedly, the GIB’s preparedness to fund new green projects has encouraged other organisations to participate, so it does play a key role as a lead investor.

Of its four core investment areas, offshore wind is responsible for the lion’s share of its total lending since 2012.

Currently, the GIB is funding part of the Eon-backed Rampion windfarm off the coast of Brighton. Its contribution currently exceeds £230 million.

In 2014/15, it funded the Sheringham Shoal offshore wind project to the tune of £240 million and, in the previous year, £220 million was lent to the promoters of the Gwynt y Mor offshore windfarm and a further £59 million helped fund the London Array project off the east coast of England.

Nonetheless, given the new government’s equivocal stance on wind power, there must be a concern about future lending policies.

Clearly, new onshore wind development is set to be constrained in the coming years; the precise impact of the changes will only be apparent once the planned legislation completes its parliamentary passage.

Offshore wind investment does have its critics, some of whom remain concerned by the far higher costs per MWh. Under the previous coalition government, offshore wind was heavily promoted, on the basis that its high unit costs would be reduced to below £100 per MWh by 2020.

With the current priority to curb renewable subsidies, offshore wind projects may find it far harder to secure government subsidies through the Contracts for Difference (CfD) scheme.

Defying these uncertainties, however, the GIB recently reported that it was well on the way to raising £1 billion for its innovative ­offshore wind fund.

In terms of promoting energy efficiency – a long-cherished government ambition – the GIB has invested in several projects, notably through providing green loans to the NHS.

The range of green initiatives is varied. They include some retrofits – covering lighting, insulation and glazing – to the installation of on-site generation using renewable heat and pumps.

On the waste and bioenergy front, change is afoot. Previously, many such projects benefited from PPP/PFI funding, which has been widely criticised in some quarters. In some cases, it has been opaque, while in others PFI has short-changed the taxpayer.

The GIB is now more focused on financing the building of merchant plants fuelled by waste products, with investors being partly protected by a series of supply contracts.

A typical example of the GIB’s involvement in the waste and bioenergy sector is its part-funding of an anaerobic digestion plant run by Birmingham Bio Power.

Funding biomass projects is also a GIB priority. Ever since the Arbre debacle in 2003, the government has been immensely keen to promote the building of such plants.

As with coal-fired generation, investment in biomass has been dominated by the 3,960MW plant at Drax. GIB has loaned £50 million of a total project coal/biomass conversion cost of £990 million to Drax Power.

It has also invested in several other biomass projects, including the Evermore CHP project in Northern Ireland.

Overall, the GIB has had a generally successful launch. But, looking forward, it may need to expand its range, especially if offshore wind investment falls victim to the government’s quest for reducing the costs of renewable power subsidies. Currently, the GIB’s activities are somewhat constrained by EU state subsidy rules.

Importantly, too, the GIB enjoys a far better profile than most banks, which – six years after the government injected £46 billion of taxpayers’ money into the hapless RBS – still remain political whipping-boys.

Nigel Hawkins, director, Nigel Hawkins Associates