Case Study: UKGIB

E4D Case Study: Part A Imperial College Business School
Public-Private Investment Partnerships
New models in renewable energy finance
January 2015
UK Green Investment Bank – Case Study

Green Investment Bank Imperial College London
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UK Green Investment Bank
Abstract
The UK Green Investment Bank (UKGIB) became operational in October 2012,
supported by £3 billion (approximately $5 billion) of government money. As part of a
multifaceted climate change strategy enacted by the United Kingdom, the bank was
founded with a mission of “accelerating the UK’s transition to a more green economy,
and creating an enduring institution, operating independently of government”. With an
experienced, professional management team in place, the UKGIB's immediate task
was to ‘crowd in’ private sector funding on new large-scale clean energy infrastructure.
But while the strategic mandate for the bank was clear, a series of tactical issues
remained about how to select new investments and manage its growing investment
portfolio. For instance, how would the team be able to manage conflicting public and
private interests? What specific type of investments would best counter market
scepticism about the renewable energy projects? Most importantly, what investment
evaluation framework would enable them to deliver on their vision of being both ‘green
and profitable’?
This case was prepared by Christopher Corbishley and Charles Donovan. The authors acknowledge
the support of the UK Green Investment Bank staff for their invaluable assistance in gathering the
material for this case study.
This case is for educational purposes and is not intended to illustrate either effective or
ineffective management of an organisational situation. The situations and circumstances
described may have been dramatized or modified for instructional purposes and may not
accurately reflect actual events.
This case study is provided free of charge under an Attribution-Non-commercial-No-Derivations
Creative Commons licence. You may download this work free of charge and share it freely. The case
studies may not, however, be changed in any way or used commercially.

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Motivations for a Green Investment Bank
Following the enactment of the Climate Change Act of 2008, the United Kingdom
made a legal commitment to significantly reduce its carbon emissions by 2050 and to
generate up to 15% of energy from renewable sources by 2020. To meet these goals,
a committee established by the UK House of Commons estimated that between £200
billion and £1 trillion of new investment would be needed over the next two decades.
Traditional sources of capital for green infrastructure were thought to be able to
provide no more than £80 billion over this period.
The analysis presented a serious investment shortfall, a situation exacerbated by the
global financial crisis. New European guidelines would put large commercial banks
under immense pressure to reduce the size of their balance sheets. The perceived
risks associated with renewable technologies meant investments into green energy
infrastructure were falling dramatically (Figure 1).
Figure 1: UK Renewable Energy Investment by segment (£bn)
Source: UKGIB Annual Report 2013/14
A series of influential reports subsequently observed a ‘market failure’ in the renewable
energy sector, and hence advocated the creation of a state-backed infrastructure
bank. Despite additional austerity measures sweeping across a number of government
departments, after the 2010 general election the government budget contained the
first mention of a ‘green investment bank’.
By 2011, plans were set out for the activation of a Green Investment Bank in three
phases (see Appendix 1): (i) Incubation within the department of Business, Innovation
& Skills and the first direct financial investments by the UK government into the green
economy; (ii) Establishment of the UKGIB as a stand-alone institution by 2012, and
(iii) Commitment of full borrowing powers by 2015-16 "subject to public sector's net-
debt falling as a percentage of GDP".

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"This is a big advance, the first investment bank in the world dedicated to greening
the economy. It's a great achievement and an example of how the Government is
working together with the private sector to get big, long-term projects off the ground
in a way that leaving it to the pure, free market can't do.”
UK Business Secretary Vince Cable
On 27 November 2012 the UK Green Investment Bank was established pending
approval from the European Union (EU) that its operations were not considered ‘anti-
competitive’ under state-aid regulations. Approval was granted soon after on the basis
that the GIB’s lending and investment activities be “additional to the market”, which is
to say the Bank must avoid “crowding out” investors from the private sector, distorting
existing markets or conferring any unfair advantage on certain market participants.
Unique from most government initiatives, the GIB was required to work on a
commercial basis, to be both ‘green and profitable’. Rather than providing grants,
regional assistance or one-off development loans, its purpose was to “crowd in” private
capital into renewable energy investments, as opposed to “crowding them out”. This
occurs when public sector spending either replaces or drives down private sector
investment as a result of the government providing a good or a service (such as
financing) that would otherwise be a business opportunity for the private sector. As
part of this, the Bank was mandated to focus 80% of its activities on four priority sectors
in which the market was perceived to have ‘failed’. These included: Offshore wind,
energy efficiency, waste recycling and energy from waste.
The UK’s Green Investment Bank model differs somewhat from its European
counterparts, such as Germany’s much larger KfW bank, described as ‘the largest IFI
in the world’ and the European Investment Fund, which predominately provides
guarantees. It differs in its remit specifically to address a market failure in the ‘green’
sector, as well as its obligation to be profitable. The GIB model has since become a
beacon in other developed countries. In 2013 the New York Mayor, Andrew Cuomo
announced $210 million in initial capitalization for the ‘New York Green Bank’ with the
aim eventually to hit a target $1 billion capitalization.
Structured as a Public Limited Company (PLC) 100% owned by the UK Government,
the GIB’s Articles of Association ensured it would maintain total operational
independence, (see Appendix 2) representing a new form of public private partnership
(PPP). Vested with £3 billion of taxpayer capital, and the ability to structure green
energy investment products across the capital structure, (from senior debt to equity),
the bank was tasked with the execution of a critical government policy, one meant to
ensure the UK’s energy future needs were met.
Renewables: The ‘Ugly Duckling’ of Infrastructure Financing
As part of meeting its state aid mandate, the Bank was initially focussed on defining
the ‘market failures’ it was designed to address. Most assumed the failures were an
inevitable cause of negative economic externalities, specifically the lack of a clear
price for carbon. This meant without intervention, the social costs of environmental
impact were not borne by investors and the private sector, nor was the social benefit
of more sustainable projects being captured or invested in.

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The global financial crisis had a profound impact on green infrastructure investment,
as well as infrastructure financing more generally. Pressure from regulators,
shareholders and governments to de-lever and de-risk made long-term financing a
less attractive proposition for banks. The majority of risk came from what banks call
“maturity transformation” i.e. borrowing short to lend long. However, bank appetites to
hold long-term assets had diminished in favour of short-term financing due to the
‘funding mismatch’ risk of financing longer-term project debt.
Credit performance of infrastructure finance has previously been strong for the banks.
Yet many commercial players were increasingly finding the cost of funding exceeded
the margins on their books. This had become a particular problem in Europe, which
historically relied on a number of banks committed to long-term project financing. In
contrast to the ‘institutional’ structure of capital markets in North America, the global
financial crisis had broken the European model of bank-led project financing,
suggesting a new institutional structure was required for the UK.
Tied to this was the fact that in a global economic environment of exceedingly low
long-term interest rates, investment institutions needed to identify real (inflation
protected) yields to match the quantum and maturity of their pension liabilities. Hence
the missing piece in this puzzle was the presence of new market infrastructure (i.e. the
intermediaries and investment vehicles) that connected pools of capital with
investment projects.
Risks and uncertainties around clean technologies
Information asymmetries and risk aversion have presented additional barriers to
achieving higher levels of green infrastructure investment from private sector
investors. As a relatively new industrial sector, there was not yet a historical track
record of financial performance upon which to evaluate risk and expected return. In
the case of offshore wind there are countless risks both in terms of construction and
operations. Potential risks included adverse weather causing maintenance delays, the
movement of foundations or array cable failures leading to construction delays, the
lack of sufficient wind and technology risk associated with the corrosion of
components. Such uncertainties were comparable to offshore oil and gas in the 1970s
and 80s – a class of asset financing commercial banks has since become comfortable
with.
Offshore wind plays a make or break role in the UK’s ability to hit its binding renewable
energy targets. Forecasts of demand required to hit those targets demonstrate
potential for generating sufficient electricity from renewables (Figure 2). However,
supply from investor-backed developers willing to take on the construction risk
suggested further encouragement was required to keep up with demand (Figure 3).

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Figure 2: Demand for Offshore Wind Infrastructure
Figure 3: Supply Status of Offshore Wind Infrastructure Projects
Political and regulatory hurdles
A number of regulatory hurdles exist in the broader European market where policy
uncertainty and austerity measures have previously led to unplanned reductions in
public-sector investments. For instance, retroactive changes in countries such as
Greece and Spain have come close to destroying the market for green infrastructure
investments. The withdrawal of support for wind energy in some countries contributed
to heavy losses in the wind industry, casting doubt on the ability of suppliers to sustain
themselves (Figure 4).

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Figure 4: Turbine Manufacturers’ Margins 2008 - 2012
Source: Bloomberg New Energy Finance
It was originally conceived that the Green Investment Bank find its ‘additional, non-
distorting’ role through a market position in which it took “slightly too much of the risk,
for slightly too little of the return” on green infrastructure projects. This was envisaged
in a world in which market failures - caused by information asymmetries and risk
aversion - might cause the private sector to underestimate the potential returns of
green energy investments. Hence at first, it was proposed the bank should be a
government-owned development bank that would own society’s “cost of capital”, thus
making a real investment return, albeit a lesser return demanded by private sector
investors.
A key question facing the newly established team of the Green Investment Bank was
subsequently how to accelerate a shift in perception about green energy investments
while earning a decent return for UK taxpayers.
UKGIB’s Mission and Business Model
Rather than acting as a “development agency”, such as the World Bank, the UKGIB
team saw its role in partnering with existing long-term investors and encouraging new
ones by being robustly commercial in its approach. Its mission of being “green and
profitable” would ensure that investors could observe decent financial returns in the
renewable energy sector. Only in this way could the Bank change existing perceptions
and attract incremental capital into green infrastructure investments.
The UKGIB’s ‘green impact’ is measured against five criteria:
1. Reduce green-house gas emissions
2. Improve efficiency in the use of natural resources
3. Protect or enhance the natural environment
4. Protect or enhance bio-diversity
5. Promote environmental sustainability

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Figure 5: UKGIB’s Business Model
The Bank also has a financial bottom line, which is to say that it is unashamedly and
unambiguously a “for profit” bank. Financial returns are based on state aid rules, on
the basis that they are always additional, but they are also based on sound finance
and a commercial return. These principles are reflected in the expertise of their
management team, who have been recruited from some of the world’s top banking
institutions, as well as the Bank’s investment strategy and due diligence process. In
its articles of association, it is even determined ‘the GIB should plan to deliver a
minimum of 3.5% annual nominal return on total investments after operating costs but
before tax’ (see Appendix 2).
In order not to ‘crowd out’ private investments already taking place in the green
economy, UKGIB’s priority sectors were selected on the basis that they were on the
cusp of being ‘mainstream investable’. Its mission was to assist in the development of
private sector markets in order that the bank’s role within them becomes redundant.
For a project to be investable by the UKGIB it must fit all six criteria set out by the
investment managers and signed off by the Chief Risk Officer through an internal
review process:
1. Fit within the state aid mandate in terms of specific ‘priority sectors’
2. Be ‘additional’ to every project. Developers must prove they cannot obtain
funding elsewhere. Often the bank starts off as a cornerstone investor and
crowds in funding by articulating the investment story.
3. Invest at market rate in order not to undercut competition. Funding must be
provided pari passu with other investors, or if the purpose is to feed stock
supply, it might involve taking equity in the project and then taking additional
revenues on the basis it is signed off as conforming to ‘market economy
investor principle’ (MEIP) rules.
4. Conforms to the five green credentials outlined in its articles of association.
5. Presents a suitable risk profile, which involves various models and forecasts,
testing the assumptions for revenues, cost of delivery and cover ratio limits.
6. Last but not least reputation is key, particularly the relationship with both the
client and the developer.

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To ensure the Bank would be profitable, it was made explicit that areas in which the
UKGIB would not invest would include the provision of grants and regional assistance,
subsidised debt or equity, high risk-lower reward, venture capital, development equity
or lender of last resort. Instead four priority sectors to which 80% of the Bank’s
investment capital would be dedicated would include offshore wind, waste/recycling,
non-domestic energy efficiency and support to the Green Deal (Figure 5). The
remaining 20% could then be committed to other green energy sectors, such as
biomass, biofuels and transport, carbon capture, marine energy and renewable heat.
Figure 5: Investment Strategy by Green Energy Sector
Creating the Investment Framework
An ongoing question for the Bank’s senior management was what level of return above
3.5% would legitimately reflect the opportunity cost of capital for investments in the
renewable energy sector. The organization needed to adopt a financial framework for
setting project hurdle rates (i.e. the minimum internal rate of return (RRR) required to
sanction a new investment).
As a veteran in the investment banking community, Chief Risk Officer, Peter Knott was
familiar with the broad range of sophisticated analytical techniques for estimating
project hurdle rates (see Appendix 3 for formulae provided by professional service
firms). But to deliver on all aspects of the Bank’s mission, he reasoned that the
financial framework should adopt a relatively straightforward and transparent process
for setting discount rates. He knew that a good discount rate for a specific project
should reflect two basic assumptions: the time value of money and an appropriate
compensation for risk. But categorizing and quantifying investment risk for large
renewable energy projects was proving to be challenging.

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Peter and his team wondered how they could quantify the risk factors involved in green
infrastructure investments when making decisions based on a risk-adjusted rate of
return. On the one hand, they understood the attractiveness of infrastructure financing
was in its ‘dependability’ as an asset that delivers fixed returns, particularly debt
financing which offered additional security in terms of repayment and less active
management. On the other hand, risks to private participants were either demand risk
in the case that consumption did not match expectations or political risk.
Given that the UK government was legally committed to meeting 15% of energy
demand from renewables by 2020, and that producer guarantees enjoyed cross-party
support, are inflation-linked and typically run for 20 to 25 years, the investment risk for
operators was low. As an instrument of policy, the UKGIB carried little political risk.
However, by coming in at the early stages of project investments, the team was
concerned with construction risk and the potential for cost overruns, making developer
due diligence such an important part of the process.
In order to calculate the hurdle rate for each project the team had to think carefully
about how these risks would be quantified before they could proceed with their
investment decisions.
Example Projects
Investment 1: Refinancing of a UK Offshore Wind Project – Rhyll Flats
Rhyl Flats is a 90 MegaWatt wind farm located 8km off North Wales in which the
UKGIB acquired a 24.95% direct equity stake from RWE AG for £57.7m. As one of the
first investments, this represented a landmark step in supporting one of the Bank’s
core sectors (offshore wind). Its main aim was to develop a secondary market for
operating offshore wind assets, allowing the release of capital back to developers on
the basis that this could then be reinvested into other projects.
Green Impact Financial Impact
- Expected to provide enough clean,
green electricity to power around
61,000 homes
- Reduced reliance on imported gas
- Helping to meet greenhouse gas
emissions and renewable energy
targets
- Investment alongside Greencoat UK
Wind Plc, first company to invest solely
in operating UK wind farms
- GIB’s investment helped RWE meet its
wish to sell a 49% holding
- Investment will allow RWE to redeploy
funding from the sale in further UK
offshore wind developments
Investment 2: Wakefield Waste PFI Project
Demonstrating the diversity of products it offers across the capital structure, the Bank
also provided £30.4m of senior debt funding to Shanks Group PLC to support a 250-
year PFI waste contract with Wakefield Council. The loan was provided alongside
three commercial banks to deliver essential funding to contribute towards recycling
facilities, waste treatment and generating sustainable power. In terms of green impact

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it achieves annual landfill avoidance of 200,000 tonnes, helps to increase the local
authority diversion rate to 90%, increases its recycling rate to 52% and provides
potential annual emissions saving of 33,300 tonnes of CO2e.
- Diversion of c.200,000 tonnes p.a. of
municipal solid waste from landfill
helping to increase local authority’s
landfill diversion rate to 90%
- Increase local authority’s recycling
rate to at least 52%, greater than UK’s
2020 target
- Provide potential annual emissions
savings of approximately 34,300
tonnes of CO2e
- GIB is providing senior debt and equity
bridge facilities pari passu with three
commercial lenders
- GIB was invited to join banking club in
mid-2012 providing necessary additional
liquidity to ensure achievement of
financial close
- Mobilised three times GIB investment
Investment 3: Realm Energy Centres Fund
The Bank has also committed £50m to the Aviva Investors REaLM Energy Centres
Fund, which provides long-term funding for public sector energy efficiency projects.
The fund made its first investment of £36m (of which GIB contributed £18m) in an
energy centre project for Cambridge University Hospitals NHS Foundation Trust over
a 25-year period. Technology includes a combined heat and power engine, biomass
boilers, efficient dual fuel boilers and heat recovery from medical waste incineration.
- Expected CO2e savings of
approximately 8000 tonnes per
annum
- Reduce the Trust’s overall energy
bills by £20m over the 25 year
operation of the project
- Help the Trust achieve its 2020
carbon reduction goals
- GIB’s investment into the Fund has
mobilised c£18m of private capital into the
project from Aviva Investors REaLM
Infrastructure Fund to support its first
investment
- GIB’s full investment commitment of
£50m will eventually mobilise a total of at
least £50m private capital into the sector
The Greencoat Fund - Achieving ‘additionality’ at a fund level
With experience providing both debt and equity in offshore wind projects, the UKGIB
worked with Greencoat to raise an offshore wind fund in 2013. Together, they had
recognised a high level of demand amongst pension funds, sovereign wealth funds
and institutional investors wishing to be exposed to the sector but lacking the
confidence and closeness to the industry to make substantial investments by
themselves. By helping to assess the fund's prospects for investment from the
Department of Business Innovation & Skills and taking a 25% equity stake in Rhyl
Flats, one of the fund's seed assets, the UKGIB helped to get the fund off the ground.

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This also involved negotiations with the EU Commission and the FCA to explore the
possibility of establishing a fund management business, which would help crowd-in
private investment, not by putting the Bank’s own balance sheet to work but by using
its expertise in investing its own funds to manage other people’s money, channelling
investment into green infrastructure projects. Based on the success of the GIB’s first
fund of this kind (having achieved returns of between 8-9% in its first year), it plans to
launch additional funds and financial products in future.
Taking the Next Steps
Over the last few months, Peter had been approached by a number of companies
seeking equity and/or debt investments in offshore wind projects currently under
development in the United Kingdom. Having carried out due diligence on each of the
projects and the developers involved, he has boiled down the UKGIB’s options to three
potential investments. Before proceeding, he asked his investment team to carry out
the following task:
 Taking into account the key risk categories for an offshore wind project,
determine the weighted average cost of capital (WACC) for the three
offshore wind projects.
The selection of a project-specific WACC should take into account an expected capital
structure for each project, the cost of debt, and the expected return on equity.
Summary data captured during the due diligence process is provided in a separate
spreadsheet, providing both qualitative and quantitative insights on the relative risks
associated with each project.
 Generate a one page investment memorandum that justifies your WACC
for each project, taking into account the Bank’s strategic mandate as well
as comparable commercial returns in the sector.
Identifying the risk categories and WACC associated with each project will be helpful
for Peter in future to understand the minimum acceptable rate of return, given each
project’s risk profile and the opportunity cost of other investments. The weighted
average cost of capital across a variety of related sectors is included in Appendix 3 as
a benchmark for his investment team.

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Appendix 1: UKGIB Timeline

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Appendix 2: UKGIB’s Articles of Association

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Appendix 3: WACC Benchmarks

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Source: Access Analytics
This paper has been produced by the Rajiv Gandhi Centre for Innovation and
Entrepreneurship at Imperial College Business School
Imperial College Business School
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www.imperial.ac.uk/business-school
This case study has been produced by Imperial College Business School
This case study is provided free of charge under an Attribution-Non-commercial-No-Derivations Creative Commons
licence. You may download this work free of charge and share it freely. The case studies may not, however, be changed in
any way or used commercially.

Case Study: UKGIB

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