Labelled the centre-piece of the UK Conservative-Liberal Democrats coalition government's green agenda, the Green Investment Bank (GIB) is primed to be at the vanguard of investment in low-carbon infrastructure in Britain. The GIB, however, is arguably one of the most contentious aspects of the coalition, as the mandarins eyeing austerity measures debate its remit, funding, and power with the civil servants focussed on a low-carbon agenda.
After much internal wrangling between the Treasury and the Department for Energy and Climate Change (DECC), the coalition recently declared the GIB is to be capitalised with £3bn, that it will begin operations in 2012 and that it will be a bank without borrowing powers.
DECC appears to have long recognised the need to create a bank capable of significantly impacting the rate and scale of the UK's low-carbon infrastructure investments, whilst the Treasury argued persuasively against increasing the debt on the government's balance sheet.
In the end a compromise between the two 'sides' has been reached - both in terms of the capitalisation and, arguably more importantly, the bank's governance and funding structure. Ernst & Young argued that in order to meet the UK's low-carbon infrastructure investment requirements - £450bn by 2025 - the most "efficient structure would require a tier-1 credit risk capitalisation level of £4-£6bn over the spending review period until 2015."
Following reports from Whitehall that this advice would be respected, rumours circulated that the government would in fact only capitalise up to £1bn, with the Treasury steadfastly refusing to provide more funding. Clearly the £3 bn is a reasonable compromise.
While most now accept that the GIB must increase in scale over a relatively short period of time, the most pertinent issue is regarding how and at what speed. Ernst & Young estimates the funding gap between supply from traditional sources of finance and the £450bn required to be of the order of £330-360bn between now and 2025.
The GIB must therefore go a large way towards filling this gap through a number of means, always acting in a way that catalyses private sector investment. The easiest way to bridge this gap is to raise the funds itself, i.e. to maintain the normal functions of a bank. However, the coalition government announced that the GIB will not be granted the power to raise funds using financial instruments - such as green bonds or green ISAs - until 2015.
The reason that fundraising won't happen immediately is because the UK government would likely need to underwrite a proportion of the funds raised by the GIB. This would add to the government's debt on the balance sheet and is therefore seen as counter to the national debt reduction programme.
George Osborne stated that the £3bn capitalisation "will leverage an additional £15bn of private sector investment in green projects" by the next election. Using the figures generated by Ernst & Young, this leaves an additional £315-£345bn to be invested over the period 2015-2025 - a figure dramatically higher than Osborne's meagre projections.
Incidentally, 2015 will be the end of the coalition's term in office. This augments a consistent green policy theme: set green policy so far in the future that it becomes inconsequential. The arguably ideologically-driven agenda of reducing the national debt is being placed far and above the unequivocal necessity of investing in a low-carbon infrastructure.
Back when this necessity appeared to be recognised, a report on the suggested funding methods, size and structure of the GIB was commissioned. The GIB Commission suggested a number of ways in which the GIB could invest in a low-carbon infrastructure , namely early stage grants, equity co-investment, wholesale capital, mezzanine debt, offering to buy completed renewables assets, purchase and securitisation of project finance loans, insurance products and long-term carbon price underwriting.
There is little or no chance of the GIB managing to carry out this full range of activities without the power to raise the funds itself. As it stands now, the GIB will be a fairly impotent institution without the power to catalyse a significant scaling-up in low-carbon infrastructure - this can only be achieved by granting it the powers of a regular bank sooner than 2015.
The coalition government appears to be gambling on the hope that investment in low-carbon infrastructure from the private sector will occur in the absence of significant government assistance, whilst simultaneously shifting the burden of responsible low-carbon policy to later governments.
Nick Oakes is an Analyst at IDEAcarbon, a carbon markets intelligence and advisory firm.
