All Hail The Green Investment Bank?
The GIB is touted as the next big thing for renewables - but will it work?
In my view, it depends.
First, let's define the problem.
- At one end of the spectrum we have large-scale projects using proven technology, which cannot get finance because banks just won't lend.
- At the other, we have firms like ourselves, who have promising new technologies, which cannot get to market for lack of equity investment.
There is, of course, a spectrum of firms and projects in between these two extremes, but they will serve our purpose here.
For large projects, the GIB can work well - simply providing project finance where there currently is none to be had, and leveraging in other sources. A GIB with £2bn pa to invest could make a significant contribution - for example, £2bn is about 600MW of offshore wind per year - with finance from other sources, that could turn into 2 - 3 GW pa - certainly a big step toward around 30GW of incremental renewable electricity that the Renewable Energy Strategy envisages for 2020.
For small renewable energy firms who need equity, the GIB could be a real winner. Most of us have, by now, secured Government grants of one type or another, but we are required to match these grants with private money, and that is hard to find as we know. So here is the opportunity for the GIB.
We need a commercial institution, which analyses businesses just as any VC would, and then selects the best for equity and/or commercial loan funding. Simplify the system, get rid of the layers of grant bodies and well-meaning quangos and let's play the game in the most effective way we know - using the market to pick the winners.
To do this, the distribution of GIB money needs to be managed through a number of commercially motivated professional investment firms.
But that is just how VC money is managed today, so what's changed.
To understand that, we need to understand why VCs are not investing in renewable power companies. It is simple - the investments are too big, and the returns are too far away and/or too uncertain.
The GIB has the opportunity to change this - by creating a number of "GIB VCs". These need to be large funds (over £200m), run by professional investors who are rewarded appropriately. They must be forced to invest in a range of strategic green sectors defined by the Government, and be patient in their demands for returns. Renewable energy companies may take 10yr to deliver, not 3yr.
For very early-stage R&D projects, there will still be an R&D grant function. But once the R&D becomes a business, which is past the seed funding and ready for VCs, all Government support should come through these new GIB VCs. By asking commercial investment managers to make choices about who to fund, and how (grants, loans, equity or others?) Government will minimise the level of grant support needed, encourage private sector investment and receive a financial return on the money committed to renewable energy.
By using market forces, the country will develop stronger renewable power companies, and those will create more jobs, growing the economy and cleaning the air at the same time.
Bob Smith
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