Green Investment Bank powers into the black

Lord Smith was chair of the organising committee of the Commonwealth Games in Glasgow. Picture: Jane Barlow
Lord Smith was chair of the organising committee of the Commonwealth Games in Glasgow. Picture: Jane Barlow
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LORD Smith is proud that as well as pump priming, his environmental investments are turning a profit at last, writes Kristy Dorsey.

Never one for sitting idle, the industrious Robert Smith has been as busy as ever since the close of the Commonwealth Games in which he played a crucial role.

As chair of the organising committee, Lord Smith of Kelvin could have ended his commitment to the Games after the August closing ceremony in Glasgow. Instead, he agreed, at the end of January, to lead Clyde Gateway in delivering the post-2014 games legacy.

He filled the intervening months overseeing recommendations on further devolution for a post-referendum Scotland, and has exchanged as senior boardroom roles at Standard Bank and SSE for new posts at Forth Ports and IMI.

One thing that hasn’t changed is his role at Green Investment Bank (GIB), where Smith is predicting a “handsome profit” in the coming year.

Chair of the bank since its inception in 2012, Smith has presided over what will amount to £2 billion of investment when GIB’s financial year closes on Tuesday. That money has been drawn down from the original £3.8bn provided by the UK Treasury for investment in renewable power and energy efficiency projects across the UK.

With some of those projects now generating financial returns, Smith talks of a bank on the verge of sustainable profits. While the financial year now coming to a close will only see GIB break even, its recent run of profitability will gain momentum as 2015 progresses.

“I know that month-by-month we have now got more coming in than we have going out,” he says. “It is quite natural as a start-up that you don’t see profits straight away because you have all of this money going out on capital projects that are still being built and not yet generating income. What we are seeing now is a shift towards projects coming on stream.”

This process has accelerated following GIB’s decision to take stakes in certain existing projects, a move that frees up cash for the original developers to invest elsewhere. Two such examples are GIB’s share in the Rhyl Flats wind farm off Northern Wales and the London Array, the world’s largest offshore wind farm.

Some capital investments are also beginning to bear fruit. The TEG Biogas plant in Dagenham opened in April last year, and is the first construction project funded by GIB to generate returns.

It has not, however, been completely smooth sailing for the bank. Last week’s announcement that it will contribute some £28 million to the £111m Levenseat facility near Lanark drew criticism from environmental campaigners concerned that too much money is being spent on incineration at the expense of recycling and other more sustainable alternatives.

Levenseat will have a 12.3 megawatt energy-from-waste (EfW) plant that will generate power by super-heating household waste that can’t be processed by an adjacent materials recycling facility.

With renewables accounting for a rising proportion of electricity carried by the National Grid, critics say EfW plants will become the “dirtiest” option in terms of carbon emissions. Dominic Hogg of environmental consultancy Eunomia says that while the processing capacity of GIB-backed plants is 1,935 tonnes annually, only 3 per cent of this is for recycling, versus 85 per cent for EfW.

Smith says GIB invests in projects “across the piece”, with the bulk of money so far put into offshore wind. He adds that EfW plants have their place within the bigger picture.

“What happens is people put things into black plastic bags, and the alternative is to put those black bags into landfill, which would be a disaster,” he says. “I would defend what we are doing with these projects. It is a good use of waste.”

During the past 12 months, GIB put £723m into 21 different projects, six of which were in Scotland. One of the last to be signed off during the year is expected to save Smith’s home city of Glasgow millions of pounds while cutting carbon output by tens of thousands of tonnes. The first phase of the city’s LED street lighting programme will see 10,000 lamps changed along main arterial routes, such as Great Western Road, at a cost of £6.3m, provided by GIB. Payback on this investment is expected to take about six years.

Smith also cites various investments to help distillers “go green” with the installation of biomass plants that burn woodchips to create electricity and supply the steam to make whisky. A £74m deal to build one such plant at The Macallan in Speyside was announced in August.

With a total of 45 UK projects now in place, GIB is looking to spread its wings abroad. Under an agreement announced last week by energy secretary Ed Davey, the bank will invest £200m from the UK’s International Climate Fund in green energy projects in Africa and India.

Smith says it is a first “baby step” towards GIB proving its capabilities in managing external funds, a milestone in the bank’s evolution. Further to that end, GIB is on the cusp of closing a £1bn offshore wind fund which it will manage on behalf of pension funds and other institutional investors – the first private capital to be taken in by the bank.

But Smith insists the bank will not lose focus on its core mission of pump-priming. If GIB proves it can make money by investing in green projects, private sector investors will be more likely to follow.

“The hope is this is going to lead to copy-cat behaviour in the private sector. That will bring down the cost of capital and be a huge boost to the sector,” says Smith.

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