UK’s green bank sale to Macquarie in tatters but Green Deals to rise again

The UK Government’s sale of its green investment bank – potentially to Australian financial services group Macquarie Group – is unraveling, with parliament told the bank has a “dismal and terrible environmental record” and an “appalling track record of asset-stripping”. Meanwhile its sale of another investment fund, which finances energy efficiency retrofits, has slipped through almost unnoticed – and is to be relaunched by the private sector.

The sales of both the Green Investment Bank (GIB) and the Green Deal Finance Company were ordered by the Conservative MP George Osborne when he held the post of Chancellor of the Exchequer in an attempt to reduce government debt.

The government is now soon expected to announce the winner of a bidding contest to buy the Green Investment Bank. Australian bank Macquarie is understood to be the preferred bidder, although the terms of the arrangement are shrouded in secrecy.

The GIB was created in 2012 and allocated £3.8 billion (AU$6.27b) of funding from the UK government with a mission to accelerate the UK’s transition to a greener economy. It has done well.

The Green Deal Finance Company was also set up in 2012 (this was the year when the Conservative-Liberal Democrat alliance wanted to be “the greenest government ever”), as a not-for-dividend company whose job was to provide low-cost financing to households for energy efficiency improvements to their homes. It has failed.

The Green Investment Bank sale could be abandoned and the bank floated

The controversy over the sale of the GIB led to reports suggesting the sale could be abandoned and the bank floated on the stock exchange instead. The Financial Times quoted an unnamed Whitehall official as admitting that an IPO (initial public offering) was possible but not imminent.

“It’s jumping numerous steps to suggest a decision has already been made,” he is reported as saying. “It’s jumping several hurdles and issues.”

On Wednesday 25 January the sale is being debated in the House of Commons, and the opposition business secretary, Clive Lewis, is hoping for some clarity. City AM quoted him as saying, “Whilst we welcome this embarrassing U-turn, the government should never have wasted valuable time and money prepping the GIB for privatisation in the first place.

“With our economy stalling because of the government’s incompetent handling of Brexit, the GIB needs a laser-like focus on developing future low-carbon technologies. Instead it’s had to deal with uncertainty generated by this ideological and ham-fisted privatisation process.”

Boosting clean energy is otherwise being addressed this week as Prime Minister Theresa May has launched her 10-point industrial strategy, which includes a commitment to “deliver affordable energy and clean growth” and a Challenge Fund to support smart energy technologies (amongst other innovative areas).

Background

The GIB is a taxpayer-owned “for profit”? bank, making investments similar to Australia’s Clean Energy Finance Corporation. When it was launched in 2012, George Osborne’s Treasury Department decided that the GIB would be unable to borrow money and, despite a clear desire by private investors at the time, be unable to issue bonds to them.

Osborne’s plan was always that it should eventually be able to operate independently of Government, although many on the left opposed this.

The bank invests in a range of renewable energy projects, including energy-to-waste, anaerobic digestion, biomass, offshore wind – and it launched a €100m green bond at COP 22 in Marrakesh in 2015.

It has been widely criticised for not being sufficiently visionary or for not backing community energy, but it has been a success all the same, particularly in supporting the difficult-to-finance offshore wind industry.

According to the bank’s chief executive, Shaun Kingsbury, this industry has now “come of age” as a mainstream asset class, driven by rapid improvements (and falling costs) in technology, installation, supply chain, operational maintenance and financing.

Just a few days ago the bank issued a report showing that its Offshore Wind Fund has exceeded its original £1 billion investment target. It has invested in five offshore windfarms with a combined capacity of 1447 megawatts.

Having backed 85 projects to the tune of £2.7 billion, GIB is in need of a capital injection. With the UK government lacking cash even for the ailing National Health Service, those funds are not likely to come from the taxpayer.

Controversy

However, the widely-touted possibility that Macquarie – which has offered £2 billion – could end up winning a competition to buy the bank has raised concerns.

“This preferred bidder, Macquarie, not only has a dismal and terrible environmental record, it also has an appalling track record of asset-stripping,” said Green MP Caroline Lucas during a recent parliamentary debate.

This view was echoed by former Tory Energy Minister Gregory Barker who said on Twitter that he was “increasingly alarmed that sale of #GIB will now see it broken up so much it threatens its future as [an] enduring institution”.

And Labour MP Ian Murray has tabled an early day motion calling on the government to halt the proposed sale of the bank.

Furthermore, it has just emerged that Patricia Rodrigues, the former investment banker who helped set up the state-owned bank, is now working for the bidders as managing director at Macquarie Infrastructure and Real Assets.

Confusion

It is in this context that a previously shortlisted bidder – Jonathan Maxwell, chief executive of Sustainable Development Capital Ltd (SDCL) – threw a spanner in the works last week, offering to match Macquarie’s bid. He has urged the Tory energy minister Nick Hurd to reject the Macquarie bid, asserting that his consortium – which includes the state-backed Pension Protection Fund (PPF), the US’s Hancock and Japan’s Mitsui – is the “best alternative” to meet the government’s goals for GIB.

Unlike Macquarie, SDCL exclusively provides energy efficiency retrofit project finance, backed by specialist funds in the UK, Ireland and Singapore, with new funds coming on stream from New York and China.

SDCL also provides financial advisory services through an investment banking group that operates in sectors linked to resource efficiency and sustainable development, such as renewable energy, energy efficiency, water and waste management and recycling, sustainable land management and low carbon transport.

Maxwell issued a statement saying: “We believe that an IPO [for the GIB] by 2020 is viable and this has been an important consideration behind our approach to the privatisation. An IPO should be feasible and attractive once the GIB’s portfolio has been built out.

“This government could retain a stake in the GIB in the meantime to benefit from the expected future growth ahead of an IPO and achieve value for money for the UK taxpayer.”

Observers are hoping that Wednesday’s debate will provide some clarity so the bank can see its pathway clear into the future.

Green Deal reborn

Meanwhile, much more quietly, the Green Deal Finance Company (GDFC) has been sold to a new owner, and the Green Deal is to be relaunched.

Originally, its 55 members came from the public and private sector and included energy companies, trade associations, local councils and potential green deal installers. They provided some of the start-up cash, with the rest provided by the Green Investment Bank and the European Investment Bank.

It had expected to deliver around £300 million of financing for Green Deal Plans before 2014. But it was an abysmal failure, and we have documented why here.

Last year it was lambasted by the Public Accounts committee, whose chair, Meg Hillier MP, said: “This blinkered approach resulted in a truly dismal take-up for Green Deal loans and a cost to taxpayers of £17,000 for every loan arranged. Savings in CO2 were minimal.”

The Energy and Climate Change Department (DECC – since abolished) oversaw the Green Deal and believed that the Green Deal Finance Company would provide loans of over £1.1 billion by the end of 2015. The actual figure was £50 million!

The finance company incurred large financial losses as a result of the low demand resulting in DECC writing off £25 million of the cash it loaned to it. It stopped offering new Green Deal Plans in July 2015.

The board of the GDFC last week announced the sale of its wholly-owned subsidiary, GDFC Services, for £40 million.

The GDFC’s new owners, Greenstone and Aurium, have stated their intention to commence the financing of new Green Deal loans by the end of the current quarter.

Richard Twinn, policy advisor, UK Green Building Council, welcomed the sale, commenting that “the limitations of the Golden Rule mean it will only be attractive to a specific part of the able-to-pay market. But in the absence of a policy alternative from government, the possible reignition of a pay-as-you-save mechanism could provide a viable option for households on moderate incomes to make improvements to draughty homes.

“However, one of the big failures of the Green Deal the first time around was the lack of incentives from government to drive uptake. Unless government grasps the nettle this could well become a problem once again.”

New owners

The new co-owners are Greenstone Finance, which invests in organisations focused on financing in renewable energy and energy efficiency, and Aurium, which describes itself as “a structured finance boutique with a focus on renewable energy”.

They say they will continue to service the existing Green Deal loans and will commence financing of new Green Deal loans this quarter.

The Green Deal was established to address the fact that the UK has some of the most thermally inefficient housing in Europe. Its loans let customers, including landlords, improve their homes by installing energy efficiency products.

The loans are repaid as part of a customer’s electricity bill, which may (critics say: only if heating was provided by electricity) be reduced by the savings generated from the measures the loan financed – a “Pay-As-You-Save” scheme. The loan remains with the property – ensuring the payments are made by the person who benefits from the energy saving.

Kilian Pender, founder and chief executive of Greenstone Finance, commented on the acquisition and the relaunch by saying, “We believe that the concept of repaying your loan as you save on your energy bills is an excellent one and with the significant private investment that we have secured, we’re looking forward to rolling the Green Deal finance scheme out across the country. We will provide homeowners a cost-effective way to improve their homes and quality of life.”

Energy assessment company Elmhurst said it looked as if the new organisation was willing to breathe new life into the pay as you save model, observing that “the private rental market is certainly an opportunity for Green Deal”.

It said that some commentators believed that the legislation on Minimum Energy Efficiency Standards – which make it unlawful for landlords to grant a new lease on properties that have an energy performance certificate rating below E, from 1 April 2018 – actually allow some landlords to avoid bringing up their properties to the required E rating. But “with the re-launch of the Green Deal, this loophole looks like being closed”, it said. “The first task for the organisation will be re-launching the loan scheme and getting traction in the market place. This is definitely one to watch this year.”

David Thorpe is the author of a number of books on energy and sustainability. See his website here.

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