The UK Government intends to sell a stake – perhaps as much as 70% – in the Green Investment Bank. Is this a good thing or not?
Announcing an intention, of course, is different from actually making a sale. The bank is still very new. It was promised in the Conservatives’ 2010 election manifesto with the intention that it should counter the slump in private investment in renewable energy installations. Setting it up, including recruiting a board and chief executive, took time and it started operations less than three years ago.
At the insistence of Lord Smith of Kelvin, whose acceptance of the role of chairman added huge credibility to the fledgling institution, the bank is headquartered in Edinburgh. Its second annual review reveals steady progress. It may not have single-handedly reversed the downward trend in renewables investment (which is Europe-wide), but it has increased its own investment and brought an impressive amount of private money into the market as well.
Last year the bank committed £723m to 22 new projects worth a total of £2.5bn, all up on the previous year (£617m, 17 projects and £2.3bn). The annual review trumpets the fact that it is the most active green energy investor in the UK and took a 50% share, but that is a stark illustration of the state of the rest of the market. Public capital is making up for the absence of private cash.
The Green Investment Bank is not in the business of providing subsidies or making soft loans. It hopes that by demonstrating that investment in renewables can be both environmentally and financially beneficial it can stimulate the investment supply from the private sector. It is projecting a 9% return on its portfolio so far.
Privatising it, or at least freeing it from state majority ownership, could bring a number of advantages. Firstly, it would free it to borrow money in the commercial market. At the moment to do so would merely add to the national debt, which is something the Government wishes to avoid. So the bank’s ability to invest is constrained by the amount of cash the Treasury gives it.
Privatisation would also free it from some European state-aid restrictions. It had to go through a long process to be able to invest in community renewables, for example, and last year committed £150m to support small-scale hydro and onshore wind projects, but it is still hampered in its ability to invest in solar technology, which the European Commission deems adequately financed already.
But it also gets advantages from being in the public sector. The biggest of these is that it can ignore Government policy when making its investment decisions. Its role is not to question what the Government’s real intentions are about renewable energy, but to make what it thinks are sound investments and to be patient in achieving a return.
Private investors do not have that luxury. The consultancy EY points to contradictions between the Conservatives’ rhetoric on energy policy and their actions. The Government likes to call itself the ‘greenest ever’, but doesn’t fit its policies to the soundbite.
“The Government appears to be favouring more expensive energy sources, such as nuclear, over more cost-effective renewable sources such as onshore wind and solar PV, despite market signals,” EY comments.
“The pledge to scrap all subsidies for new onshore wind projects and devolve decision-making powers on planning applications to local authorities has left the wind sector perplexed, and cast a shadow over the estimated 7GW of projects in the pipeline. Meanwhile, the complete omission of solar from the Conservative’s manifesto has left this previously burgeoning market with little visibility on whether it will have a starring role in the UK’s future energy mix, or be nothing more than a footnote, despite experiencing record growth in 2014, as installations increased 79% to almost 5GW.”
This helps to explain why the private sector has not been rushing to invest in UK renewables and why the Green Investment Bank is needed at all.
When the Government does offer shares for sale, the questions will be who will buy them and at what price? It is a lean and efficiently run business, which turned a profit of £100,000 last year – modest, but good going in just its second full year of trading. But it is difficult to see why another bank or private investor should need to own the GIB, rather than just making the investments themselves.
The Government is hoping for at least book value – that is to get back the money it has invested so far. That is not a demanding price for a profitable, well-managed bank, but it may be hard to achieve for an institution which is still in the start-up phase and whose major investor wants to cash out early.
Coming so soon after the announcement about the premature ending of subsidy for onshore wind, what signal does it send to the market? That the UK Government is not a long-term investor in renewables?
This blog first appeared on the David Hume Institute site and is reproduced here with permission.