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IN DEPTH: UK's new green bank will be walking a tightrope

Given the delicate path that the UK’s Green Investment Bank (GIB) will be forced to tread, whoever is in charge of headhunting would do well to focus on candidates with a background in tightrope walking.

The bank is being asked to invest in emerging, inherently risky clean-energy technologies, while simultaneously making a satisfactory return on the initial £3bn ($4.8bn) the government has seeded it with.

But the Edinburgh-based bank cannot afford to be too circumspect in choosing its investments. The initial funds are intended to cover only the next three years — and not getting the money out of the door quickly enough would be seen in almost as damning a light as investing it injudiciously.

Robert Smith — Lord Smith of Kelvin — who was named chairman of the bank in May, acknowledges that it is already being pulled in many directions.

“We don’t have a venture-capital mandate, and we don’t really have a development-capital mandate either,” he says, even though the institution is being compared with Germany’s KfW development bank, which has invested heavily in its country’s offshore wind programme.

Smith, who is also chairman of utility SSE, says the metrics by which the institution will ultimately be judged by the government “have not been finalised, and are part of ongoing discussions”.

The bank has been set up to strategically invest money to “accelerate” broader investment in the British clean-energy sector. But, Smith concedes, the feelgood aspect of that mission goes only so far. In an era of austerity, losses will be unacceptable.

“We’re not required to make super profits,” he explains. “But we do have a limited requirement from government to make a return across our portfolio.”

That will not be easy, given the three “priority sectors” on which the GIB has been directed to spend at least 80% of its initial money: offshore wind, waste-to-energy and energy efficiency. The remaining 20% can be spent at its discretion on other clean-energy sectors, including nuclear.

The good news for Smith and the GIB’s recently announced chief executive, Shaun Kingsbury, from private-equity firm Hudson Clean Energy Partners, is that turning a profit ties in with its mission to mobilise private money that would otherwise remain on the sidelines. “At the end of the day, you’re not going to convince private money to come and join you if you’re seen as a low-profit or loss-making institution,” Smith points out.

Malcolm Ball, who is in charge of steering the bank’s energy-efficiency investments, says the decision to focus on the three sectors was based on helping technologies that are “nearly investable”.

“On one side of [the spectrum] are things like solar and onshore wind, where the judgment is that the private capital markets don’t really need to be convinced — they’re already investing,” Ball says. “On the other side you have a series of early-stage technologies — including wave and tidal, carbon capture and storage, a number of waste technologies — which are frankly not yet at that stage of being nearly investable. We’ll have done our job with the [three target sectors] when pension funds and banks generally want to deploy large amounts of capital in them.”

Ball would also be “delighted but surprised” if less mature sectors pass the threshold of being “nearly investable” within three years, the point at which the government will weigh the success of the GIB and decide whether to recapitalise it.

The bank will not have full borrowing powers until 2015, to avoid adding to the national debt. After the pilot period, it may be able to borrow money as needed with the sovereign backing of the Treasury, an option many believe it should have had from the start.

While calling £3bn “quite a lot to be getting on with”, Ball acknowledges that it will be far easier to make a difference in energy efficiency and waste than in offshore wind, where a single project could easily soak up the entire pot. With offshore wind, he says: “What you’ll see us doing is working with banks and equity investors where they’re keen to deploy some money.”

The bank has disappointed some people by indicating that it is unlikely to invest in offshore projects at the construction stage, preferring to come in later to help developers sell them on to longer-term investors so that they can “recycle” their capital.

“Maybe we can help give investors some more firepower to get a deal moving, or maybe if we spend alongside them we’ll give them more credibility, or maybe we’ll fill gaps in syndicates of debt or equity that people are trying to build,” Ball says. “We want to establish offshore wind as a recognised asset class and a normal form of mainstream investment activity.”

Initially, the GIB will be “limited to investing on commercial terms”, rather than at rates close to the London Interbank Offer Rate, which would be more beneficial to developers. “This is... a work in progress,” Smith says. “But in the first instance, the bank will be lending and investing on market terms.”