“When I became Prime Minister, I said that Britain would have the greenest government ever. And that is exactly what we have . . . the world’s first dedicated green investment bank,” said David Cameron, speaking at the world energy ministers climate summit in London in late April. The establishment of the first green investment bank moved a step closer in December 2011 when the UK business secretary, Vince Cable, announced the bank’s first priorities through 2016.

Priority Sectors

The bank is designed to accelerate private sector investment in the green economy in the United Kingdom. Offshore wind power generation, commercial and industrial waste processing and recycling, energy from waste generation, non-domestic energy efficiency and support for the “green deal” will be the first priority sectors for the bank. The “green deal” is planned to start in the autumn 2012 and consists of £14 billion of investments funded by the government for home and business energy efficiency upgrades. It is also expected to create more than 65,000 jobs in the insulation and construction industries in the UK by 2015.

A new team, called UK Green Investments or “UKGI,” has also been set up within the government’s department for business to drive investment in green infrastructure until the green bank is formally established. The government says that at least £110 billion ($174 billion) is required by 2020 to replace aging power plants, to upgrade the grid and build renewable energy projects. The lack of sufficient and appropriate financing may threaten the UK’s transition to a low-carbon economy.

Full Borrowing Powers by 2015

The government committed in the 2011 budget to capitalize the bank with £3 billion ($4.77 billion) through 2015. The bank will be fully established following two key phases.

The first phase relates to the government’s investments being managed by UKGI from 2012 until the bank receives state aid approval from the European Commission. The government expects to obtain such approval by September 2012, but said it would start making investments in green projects from April 2012. For this purpose, UKGI has been provided with funds by the government (around £100 million) to invest in small waste infrastructure projects. It was reported that another £100 million has been made available for investment in the non-domestic energy efficiency sector.  

The second phase is the establishment of the green bank as a standalone, fully operational institution following the European Commission’s approval, with full borrowing powers from 2015 (subject to public sector net debt falling as a percentage of gross domestic product). Once established, the bank is meant to operate at arm’s length from the government despite the government being the sole shareholder.

Open For Business

The government is investing directly, on an arm’s-length basis, ahead of obtaining state aid approval from the European Commission.  

Eighty million pounds have been committed to two specialist fund managers who are responsible for generating and managing investments in areas such as waste recycling and reprocessing facilities, pre-treatment projects and energy-from-waste projects. The maximum amount of individual investments is not likely to exceed £15 million, suggesting that the funds are likely to back small- to medium-sized projects rather than large-scale waste-to-energy projects.  

An initial fund of £50 million will be managed by Foresight Group, a leading independent alternative asset manager specializing in environmental, infrastructure and private equity investing, and an initial fund of £30 million will be managed by Greensphere Capital, a specialist investment firm focused on sustainable energy and infrastructure.  

The government expects the funding to jump start investment in small-scale waste infrastructure projects. Vince Cable commented recently: “These first investments are a landmark moment. They represent a great opportunity to unlock substantial commercial investment in green technologies and infrastructure. The government has committed to setting the UK firmly on course towards a green and growing economy, and today is another important step in that direction.”  

All investments made by the fund managers on behalf of UKGI will be matched, expected to leverage in at least an additional £80 million to the sector.

KfW as Adviser

The green bank will receive advice from the German statecontrolled bank, KfW. KfW announced that it has agreed to exchange ideas about investment in low-carbon energy projects. KfW has confirmed that a memorandum of understanding between the two banks establishing consultation services was signed in Frankfurt on April 12, 2012. KfW’s chairman, Ulrich Schroeder, has commented: “As a development bank with long experience in climate and environmental protection, we are happy to support the bank in an advisory role, using our expertise in these promising areas of activity.”  

He added: “Close bilateral networking between national development banks in Europe is imperative for successful work in environmental and climate financing.” KfW has already advised similar institutions on the topic in eastern Europe. Its loan programs include projects in renewable energy generation, energy savings and efficiency measures such as home insulations.

Location

The headquarters of the bank are to be located in Edinburgh, with the bank’s main transaction team based in a London office. Edinburgh will provide for the bank’s corporate headquarters, asset management and back office functions. London will be the base for the bank’s major transactions operation. It is said that the formal recruitment process for appointments to the bank and senior management team will begin shortly, with the appointment of the chair being made in the spring 2012.