“We are here to do innovative deals”

Edward Northam is head of investment banking at UK’s Green Investment Bank. (Photo: Green Investment Bank)
Edward Northam is head of investment banking at UK’s Green Investment Bank. (Photo: Green Investment Bank)

The UK’s Green Investment Bank has been busy working on the first financial close for its new offshore wind fund. It is the first of its kind in the world. Edward Northam, head of investment banking, spoke with S&WE about what makes the government owned bank special.

S&WE: Could you please tell us about your work and about the assessment that made you focus on offshore wind.

Edward Northam: When we were set up our role was to finance parts of grid infrastructure that are not able to access sufficient private capital. Part of the infrastructure market was working quite well, and other parts weren’t.
Onshore wind – certainly mainstream onshore wind – was seen as a well-financed market. Whereas offshore wind, because it was early stage in terms of industry maturity and because the capital requirements were larger – as the projects were larger – was seen as being short of capital. This is why we were asked to focus on it. We are 100 % government owned so we also had to have a discussion with the European ­Commission which regulates state aid to avoid market distortions.
We had to convince them that the part of the grid infrastructure space where we would invest was the part where there was a shortage of capital. As for solar, they weren’t convinced that it was a ­market that wasn’t well financed. For offshore wind, we were able to clearly demonstrate that there is a funding gap. But our shareholder – the government – also has a view. They don’t want public capital to go where private ­capital is
already flowing.

UK Green Bank’s new offshore fund raises hopes
The UK’s Green Investment Bank has so far ­invested £ 1.8 billion in 41 projects throughout the UK, including offshore wind – which has ­taken just under half of the investment – as well as bioenergy, energy efficiency and energy from waste. Some observers feel the two-year old ­institution isn’t yet fulfilling its potential, as it currently can’t borrow. Yet if the new Offshore Wind Fund strategy works, new sources of capital for offshore wind could become available, with potential implications for other parts of the ­renewable sector.
The hope is that equity stakes in operational wind farms can offer a good opportunity for ­investors seeking long-term, inflation-linked ­returns, including long-term infrastructure investors such as sovereign wealth funds and pension funds. The UK government said in December it would report on progress to bring new capital ­into the Green Bank, when it presents the ­budget in the Spring of 2015.
Meanwhile, the bank’s model is being ­copied around the world. There are now plans, at different stages of development, to launch similar ­institutions in seven countries across three continents. In the United States alone, projects to set up green banks are in place in six states.

S&WE: You lend on commercial terms, so what makes you special? Is it a different perception of risk?

Northam: Two things make us special, to use your term. First is that we are committed investor to this space. So unlike lots of other financial investors who look across a much broader landscape, this is all we do. This has enabled us build a team with sector, technology and industry knowledge and experience. So that means we are looking at the same risks but we can look at them from a more informed and knowledgeable place. Other investors may be looking one week at a toll road, another week at an airport and another week at a windfarm. That’s one of the things that make us quite a unique organisation.
Second, there is the flexibility of our capital. We can provide debit capital or equity financing or indeed ­financing anywhere else in the capital structure. The requirement is that the return we are getting for a specific investment must compensate for risk we are taking. But if we are talking about debt, that‘s a ­lower risk and needs a lower return. If we are taking equity we’ll take more risk so we need a higher ­return on our capital. But it’s that flexibility and that ability to participate anywhere in the capital structure that makes us unique.

S&WE: What was your biggest achievement of 2014?

Northam: Our biggest achievement last year was to continue to do innovative “first of kind” trans­actions as well as continuing to commit capital to green and profitable projects. You’ve already raised that everything has to be commercial. We can’t expect to attract capital and mobilise additional capital unless we can demonstrate quite critically to other investors that you can make attractive investments in this sector. And that’s at the core of what we do. We also try to do things that are “first of kind”. We are backing projects such as the ­Westermost Rough offshore wind farm, where we ­financed the first commercial scale deployment of the Siemens 6 MW turbine, at that time the largest turbine in commercial operation. It’s those more ­innovative deals that we are really here to do.

S&WE: What are your hopes and expectations for 2015?

Northam: We are in the process of raising our dedicated offshore wind investment fund, so we look forward to achieving close on that, which is going to happen fairly soon. That’s an initiative we have been working on for a while and it’s the first of kind its kind in the world. Then another area of focus is how to broaden our balance sheet looking at ways in which we can access other pools of capital over the next 6 to 12 months. To date we have worked on a project by project basis, through the new offshore fund we are doing via a dedicated vehicle. So the question is: what are other ways in which we can ­attract other sources of capital to this market?

Video - Edward Northam, Head of Investment Banking at the UK Green Investment Bank (GIB), explains GIB’s offshore wind investment strategy. (Source: UK Green Investment Bank)

S&WE: Any other really interesting developments in the sector?

Northam: We are finding that there is increased ­interest and appetite from financial parties and ­investors to look in this space. We are certainly finding that debt capital is starting to flow. The shape and terms of that capital has certainly changed from what it previously was. The types of providers of debt financing have certainly changed so you see a lot of institutional debt capital raised.
In terms of our role in funding the gap, increasingly we are finding that the gaps are on the equity side. Our portfolio is now around 40 % debt, and 60 % equity, and we expect that over time that increases even more towards a more ­equity-based portfolio. This is particularly true for activities in the waste to energy sector but also probably true in offshore wind. We see a key role for the bank in the next 12 to 24 months in terms of funding the construction of new projects that are at the back-end of ROCS regime or at the ­beginning of the Contracts for Difference regime (note: the old and the new UK support systems for renewables, ­respectively).

The interview was conducted by Germana Canzi.

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