Green Investment Bank reins in off-shore windfarm funding

Britain's Green Investment Bank plans to channel funds for offshore wind projects into facilities that are already operating and probably won't fund the more risky construction phase.

Ian Nolan, head of origination at the government-backed institution, said the 3 billion pounds ($4.6 billion) set aside as the bank's initial capital isn't sufficient to allow state funding for construction projects. The bank expects to have full borrowing powers only after 2015, assuming government debt is falling as a portion of economic output.

The intention to focus on financing wind farms only after they're operating is a "surprise" to the industry, which hoped the institution would back projects before they're built when risks are higher, said Angus McCrone, a senior analyst at London-based researcher Bloomberg New Energy Finance.

"The expectation had been that the GIB would step in to try to fill the perceived gap in the provision of loans for the higher-risk construction stage of these projects," McCrone said. "That demand for pre-construction debt will now have to be met entirely by utilities, commercial banks and multilateral lenders like the European Investment Bank."

Offshore wind capacity in the U.K., the world's largest market for marine wind farms, exceeded 2.5 gigawatts in September for the first time, representing more than 60 percent of the European Union's offshore wind capacity, according to RenewableUK. The government has a target to boost that to 18 gigawatts by 2020. Prime Minister David Cameron promised to set up the Green Investment Bank to catalyse investment.

‘Realistic'

While co-investing with others in the construction of offshore wind farms is within the bank's mandate, Nolan said that it's currently more "realistic" to mobilize institutional investors once the wind farms are working. The capital then would be recycled into construction, he said by e-mail.

"We would like to see this asset class established in both the bank and institutional debt markets, as well as in both unquoted and quoted equity markets," Nolan said. "Given the scale of the financing needed by the offshore wind industry, we need to seek to attract investors from each of these different pools of capital."

European "State Aid" approval for the bank is expected to be given early next year and the UKGI has been setup to make investments in the interim. The bank will start with 3 billion pounds that could leverage a further 15 billion pounds of private investment. It will prioritize offshore wind, energy efficiency and the Green Deal program to insulate homes.

Debt funding

Where the GIB's capital is provided as debt, it will initially invest solely on market terms, Nolan said. Permission to provide "aid" to projects will be subject to further approval.

"Furthermore, there is the issue of crowding out, which of course is what the state aid approval process is seeking to prevent," said Nolan.

"In any event, the GIB will want to encourage the development of investors in the sector, and is unlikely to succeed in that endeavour if it provides finance which undercuts them in the market place."