The cynics were furious. Less than 48 hours had passed since UK Prime Minister Theresa May had called for a shock election in April when her government announced an agreement to sell off the Green Investment Bank to Macquarie in a £2.3 billion ($2.9 billion; €2.7 billion) deal. “Politically dubious” and akin to “selling off the family silver” was how the Liberal Democrats’ Ed Davey, Energy Secretary when the GIB was formed in 2012, described the move.
However, Nick Hurd, the UK Climate Change and Industry Minister, claimed privatising the bank gave the UK “the best of both worlds” after five years in government hands. “We have secured fair value for the UK taxpayer. GIB has a well-funded new owner that is committed to the Bank’s green mission,” he added. Perhaps, as ever, is it a case of the truth laying somewhere in the middle?
Let’s start with the basics: Macquarie is indeed “a well-funded new owner”, with the Australian group having A$501.7 billion ($374.9 billion; €343.9 billion) of assets under management as of the end of last year. On the renewables side, Macquarie has invested or arranged over £8.5 billion to fund projects across the world in the last seven years. Its bid was also backed by the £49.8 billion Universities Superannuation Scheme pension fund and London-listed debt fund GCP Infrastructure.
Yet what has attracted the ire of critics since Macquarie emerged as an interested party in the GIB last year is, in Hurd’s words, its position – or lack of, as per the accusations – as an “owner that is committed to the Bank’s green mission”. Allegations from a cross-section of MPs in January that Macquarie was planning to asset-strip the GIB led to Hurd being forced to answer questions in an urgent session in Parliament, while other opponents pointed to previous investments in fossil fuels as evidence for Macquarie’s lack of commitment.
Designed to protect the GIB’s green mission is the Green Purposes Company, a group of five trustees that hold a special share in the GIB with the powers to approve or veto any proposal that may be made to amend the green purposes set out in its articles of association. The five trustees have a variety of energy, environmental and government experiences and will release an annual report on the GIB’s green performance.
“The green mission cannot be changed without our approval,” says trustee Trevor Hutchings, a former civil servant at the Department for Energy and Climate Change and now director of strategy at Gemserv, having previously worked at the World Wide Fund for Nature. “But if the GIB went against its green purposes then that would essentially be a breach of company law. Like any other shareholder, we would have recourse to the law to ask for such a breach to be dealt with. We don't expect that to happen as Macquarie has clearly committed to its green purposes.
“If that did happen, then there would be legal remedies that could be exercised as a shareholder in the GIB. We will have no role in the day-to-day operations of the GIB or play any part in the investment approval process that GIB or Macquarie might have in place.”
For its part, Macquarie addressed the asset-stripping claims on the day of the sale, saying up to £230 million of assets in which the GIB’s “job has been done” from its waste-to-energy and bioenergy portfolios will be sold. It was also keen to point out it would invest or arrange £3 billion into green projects over the next three years, compared to the £3.4 billion invested by the GIB since its formation in 2012.
It would be “business as usual” given its own track record of investing in renewables, according to Mark Dooley, Macquarie Capital’s head of infrastructure, utilities and renewables, who said that during its years of renewables investments, Macquarie has been somewhat more adventurous than the GIB even.
MORE THAN JUST A BANK
The sectors Macquarie said it would direct funds to – including energy storage and tidal energy – seem to support Dooley’s claim. He said Macquarie would be interested in being an equity investor in the flagship Swansea Bay scheme, were it not for the long queue ahead of it. A new offshore wind fund will also be launched after the GIB closed the world’s first-ever such vehicle on £1.1 billion this January, Macquarie confirmed, while a new “low-carbon lending platform” and a “green infrastructure investment platform” will also be created. Macquarie, however, declined to comment further on what the latter two platforms will seek to invest in until the deal completes.
Such investments would appear to continue to fulfil the bank’s founding mission to “mobilise investment in the UK's green economy” and “catalyse a sector-wide improvement in these areas”. Also under consideration for a Macquarie-controlled GIB – in addition to further investments in energy efficiency and bioenergy – are solar and onshore wind projects. The 11.2GW and 10GW of these respective technologies that the UK has installed point to sectors that have already been catalysed and have become rather successful UK industries and in this sense, they would represent a departure for the GIB. Aside from investing in community wind farm schemes and providing senior debt to one onshore project in Scotland, the green bank steered clear of onshore wind and solar as part of its role to address market failures and stimulate private investment.
The bank was also – barring the £200 million pilot scheme UK Climate Investments – a vehicle specifically for the UK green economy. Further eyebrows were raised when both the government and Macquarie earmarked Europe as an investment destination in their comments following the deal, with Macquarie highlighting several markets in western Europe where it is already active in the renewables space as possible areas to invest with the GIB. Dooley sought to allay such fears and said that, while there is no specific allocation towards any geographies, Macquarie’s three-largest recent renewable energy deals have all occurred in the UK, in offshore wind and in the 299MW Tees biomass project, set to be the world’s largest new-build biomass plant.
A different vision for the GIB was proposed by Jonathan Maxwell, chief executive of investment firm Sustainable Development Capital, which led a rival bid to Macquarie and was backed by the Pension Protection Fund, Mitsui, General Electric and John Hancock on a pledge to keep the GIB “British, green and growing”.
“On the British side, we think there's a significant job to do in the energy market here in the UK,” he says. “The UK has a uniquely interesting problem and might be one of the most attractive and interesting investment energy markets in the world because of the scarcity and dynamics of the marketplace. Keeping it focused on British infrastructure at a time when it couldn't be more important for the British energy sector we thought made a great deal sense.
“We think there's a very different way of wiring the British energy economy which is bringing energy into town, distributed power solutions, energy efficiency solutions and in due course storage. That concept of efficient and decentralised energy is very much how we saw a large part of the GIB's future. The vendors, though, had other ideas.”
HITS AND MISSES
As the GIB moves into private hands, it seems apt to assess just how effective and successful the bank was as a government-owned vehicle. As a for-profit bank, the GIB had a dual role of being a catalyst and still generating returns.
The bank initially began by posting a loss, a result that was to be expected at the outset, according to the GIB, with the £6.2 million pre-tax loss in 2012-13 a result of capital not being fully invested and projects yet to become operational. This was reduced in 2013-14 to £5.7 million and by 2014-15, it had turned a net profit before tax of £0.1 million, as per its target.
By this stage, the GIB was actively benefitting the UK’s green economy. It had successfully met its target of a first close on its inaugural offshore wind fund in March 2015, brought pension funds and sovereign wealth funds into the market, and was in line to deliver a predicted 9 percent return once projects became operational.
However, cracks were beginning to appear. The GIB committed £723 million in new capital in 2014-15, below its £800 million target, while also narrowly missing its mobilisation of additional capital target, bringing in £2.40 of private capital in return for every £1 invested by the bank, compared to a £2.50 target.
In the final available accounts for the GIB in 2015-16, a £9.9 million profit was delivered as projects began to come online, yet this was rather below its target of between £15.8 million and £25.8 million. While some of this shortfall is a result of anticipated GIB deals being replaced by private capital and achieving its purpose, some delayed deals and falling power prices also led to the missed target. In addition, its target of closing the offshore wind fund by the end of March 2016 was missed, with the vehicle closing in January this year, some 10 months after. The GIB’s capital commitments were also at the lower end of its target range, providing £770 million after aiming to deploy of between £726 million and £926 million.
With only four years of accounts available, it is difficult to declare the GIB a resounding success or disappointment. Yet investors in the UK’s renewable energy market are largely positive about the bank’s contribution to the industry and its continued significance in its new Macquarie era.
“They’ve made a very valuable contribution to the broader bioenergy market,” said Mike Dunn, director of bioenergy fund manager Iona Capital. “They've managed to keep investment flowing whereas it probably previously would have stalled and I believe they will continue to be an important player in the sector.”
Maxwell concurs, with the GIB having provided a £50 million cornerstone investment to SDCL’s first energy efficiency fund in 2012. “It was a big catalyst for us,” he explains. “It was our first government-backed energy efficiency fund and it helped us establish a really innovative fund in the market. I think the market will now continue and develop well, with or without the GIB.
Danish offshore wind giant DONG Energy also sung the praises of the GIB for its £241 million commitment to the 210MW Westermost Rough project, its first construction-phase investment in an offshore wind project, allowing the firm to free up additional capital.
Controversy will remain, though, over the bank’s investments in biomass projects, with a Chatham House report recently adding to environmentalists’ concerns around the technology’s net impact on carbon emissions. The GIB also provided £125 million of senior debt to the Green Deal Finance Company, launched by the UK government to help support the Green Deal, its ill-fated residential energy efficiency initiative. The scheme “not only failed to deliver any meaningful benefit, it increased suppliers’ costs – and therefore energy bills”, the National Audit Office said last year.
A failed government-backed green initiative may well touch on some of the wider issues affecting the GIB’s success. While it would be unfair to describe the current UK government’s reception towards renewables in general as hostile, the enthusiasm is certainly significantly less than when the idea of creating the GIB was included in all the major parties’ manifestos ahead of the 2010 election. Broken promises on subsidy support in recent years have dented some of the confidence in the sector and indeed, in some smaller cases negatively affected GIB revenues, while former Chancellor George Osborne’s insistence on the GIB being unable to borrow money from the outset hampered its capabilities.
Macquarie paid a total £2.3 billion for the GIB, determined by a £1.7 billion transaction price and a further £600 million in future funding commitments that the government had outlined. The government had provided £1.5 billion in funding since 2012, with the transaction price ensuring an approximate £160 million premium and “fair value for the taxpayer”, according to Hurd.
While election restrictions meant the government was not able to provide comment on the valuation, some sources have noted the relatively “modest” profit generated by the government.
“In the context of a 20-25-year lifecycle of a typical renewable energy project, the GIB hasn't been around for a long time,” argues Tomas Freyman, managing director of valuations and opinions at mid-market investment bank Lincoln International. “Hence, the return that a shareholder can generate is spread over the life of a project. Alternatively, if the project is sold on the secondary market instead, that is when the positive impact of yield compression (which we have seen in recent years) can have a significant impact on shareholder value or return.”
Yet it seems the valuation may have been guided by the current value of the GIB's portfolio, rather than what it could potentially generate in the future. The current book value of its investment assets nears about £1 billion, while the group’s total assets in its last accounts numbered £1.62 billion. These accounts also record 75 percent of the portfolio as being under construction, the assets of which should rise in the future once they begin operating.
With Macquarie not telling more about the future of the GIB until the deal officially closes, it is too early to tell how catalytic the bank will be moving forward. The market seems to have mixed views about the usefulness of multilaterals in green finance, though some argue they play a key role in pushing technologies that are at the pre-commercial level over to the commercial edge.
Looking for inspiration going forwards, perhaps the GIB should follow the example of its Australian counterpart, the Clean Energy Finance Corporation. Having survived an attempt at abolishment by former Prime Minister Tony Abbott, the Australian renewables sector is experiencing a belated wave of investment with new chief executive Ian Learmonth – coincidentally, a former Macquarie director –- highlighting demand management systems and storage capacity as the bank’s and the industry’s future.