Lingering uncertainty over its potential impact on offshore wind hung over the UK’s Green Investment Bank (GIB) as it formally opened for business in Edinburgh.
The first of its kind anywhere in the world, the GIB has been seeded with an initial £3bn ($4.8bn) to disburse over the next three years, with the potentially contradictory goals of accelerating the flow of private capital into “nearly investable” sectors while also turning a small profit.
The GIB’s three “priority” sectors – for which 80% of its funds are earmarked – are offshore wind, waste and non-domestic energy efficiency.
GIB chief executive Shaun Kingsbury, poached from the private equity world, says he anticipates the bank making its first investment in offshore wind within “four to six weeks”.
Some in the offshore wind business have been disappointed by the GIB’s professed strategy of only investing in offshore projects once they are operational, rather than taking on construction risk at earlier-stage projects.
But chief investment officer Ian Nolan says that, given the bank’s limited financial firepower relative to the enormous sums required for offshore wind farms, such an approach guarantees the most value for money.
“Our capital on its own is not enough to solve [the financing shortfall] facing offshore wind,” Nolan says. “That problem is profoundly about attracting external capital into the sector.”
In the pre-financial crisis world, project-finance banks would have backed offshore wind farms through construction. But these banks have “pulled back from the marketplace”, leaving utilities to finance the build-out of projects on the backs of their own balance sheets – a reality that could jeopardize their credit ratings, thereby denting their ability and appetite for moving projects forward.
“The long-term capital markets are deeply disrupted,” Nolan says. “That doesn’t uniquely apply to green infrastructure, but it’s had a very acute impact on green infrastructure.”
“In our view, and in our planning assumptions, that’s a permanent structural shift,” he says. “This is not a market which is just going to right itself and come back to where it was in any short period of time.”
Nolan adds that some of the blame belongs to the wind industry, which has a “history – some onshore, some offshore – of issuing forecasts that are not entirely reliable”.
The consequence of all this that debt and equity markets are “sceptical” of offshore wind and “need to be convinced”.
The GIB’s strategy, then, is to line up with investors willing to take a long-term stake in an operational wind farm, thereby allowing the utilities to “recycle” their capital back into new offshore projects. That dynamic will need to be enough to propel the industry forward over at least the next few years, Nolan says.
Launched at its new headquarters in Edinburgh by UK energy secretary Ed Davey, business secretary Vince Cable and other officials, the bank unveiled its first two investments – £8m in an anaerobic digestion facility in northeast England and £5m in energy-efficiency improvements at an insulated panel factory in Wales.
While the launch came with few surprises, the bank did confirm that it will not have the ability to support nuclear energy – a key concern for the renewables industry and environmentalists as the GIB has taken shape over the past two years.
Beyond its priority sectors, the GIB has the European Commission’s permission to invest in five other sectors – biofuels for transport, biomass, carbon capture and storage, marine energy and renewable heat.
But given its mandate to turn a profit, and the fact that it will be reassessed in several years – and possibly given the ability to raise money on its own – the scope for investing in areas like wave and tidal energy is extremely limited in the near term.