Environmental Audit Committee - Minutes of EvidenceHC191

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Oral Evidence

Taken before the Environmental Audit Committee

on Thursday 12 September 2013

Members present:

Joan Walley (Chair)

Peter Aldous

Mark Lazarowicz

Dr Matthew Offord

Mr Mark Spencer

Dr Alan Whitehead


Examination of Witnesses

Witnesses: Shaun Kingsbury, Chief Executive Officer, Green Investment Bank, Tessa Tennant, Non-Executive Director, Green Investment Bank, and Jonathan Maxwell, CEO and Co-Founding Partner of Sustainable Development Capital LLP, gave evidence.

Q75 Chair: It is a great pleasure for the Environmental Audit Committee to have the opportunity to come and visit the Green Investment Bank in its very new office space. Thank you very much Shaun Kingsbury and your colleagues, Tessa Tennant and Jonathan Maxwell, for arranging for us not only to have this session here today in Edinburgh but to have an opportunity beforehand to have a very brief but nonetheless detailed look at the facilities and accommodation that you have here. By way of context, it is important to note for the record that this Environmental Audit Committee undertook a previous inquiry, so it is quite right that we should follow that up and see just how much of what has been agreed is now being put into policy and followed through.

First, to get us started this morning, is there anything you would like to put on the record about your long-term views and where you feel you are now in the great order of things?

Shaun Kingsbury: Thank you very much and welcome everyone. I am very pleased you could make the trip; it is great to host you here today. The office really is new, it is a couple of weeks old, so as we showed you around, we tidied up all our boxes-we had just moved in. Let me introduce my colleagues and ask them to say a few words of introduction and then I will make a statement about where we are with the Bank.

Tessa Tennant: My name is Tessa Tennant. I am Chair of the Interim Green Committee of the board of the Bank. My background is in green finance. I was involved in launching the UK’s first green investment fund in 1988 and I have been active in the field ever since.

Jonathan Maxwell: My name is Jonathan Maxwell. I am the Chief Executive of Sustainable Development Capital. We act as a fund manager for the Green Investment Bank within the energy efficiency strategy. Sustainable Development Capital-as the name portrays-is focused exclusively on arranging finance for the sustainable development markets. Our investment business is involved exclusively with investing in energy efficiency projects.

Q76 Chair: Thank you. What I will say, both to you as witnesses and to my colleagues, is that it is important that we speak up and try to use the microphones as much as possible to assist with the transcription that we will have from this session today.

Shaun Kingsbury: Let me say a few words to introduce the Green Investment Bank. Our role in life is to catalyse private sector investment. We have £3.8 billion of initial capital from the Government to do so, but our job is to bring in private sector money because of the scale of the challenge of moving the UK towards a more green and sustainable economy. Estimates show that it will require approximately £200 billion to be invested in the next 10 years, about £110 billion of that in low carbon generating assets. We have a concept here of investing that with a double bottom line; it is a financial return on those investments and a green return. We measure the financial return, as you might expect, by profits or project IRRs; we measure our green return by looking at things like green power produced, avoided CO2 emissions and avoided waste to landfill or better recycling rates. We are a for-profits bank and we are focused on making a return on that capital. Everything we do is aimed at being additional to the market. By that I mean that we look for projects that are both green and profitable but are short of capital. We come in and try to bridge those projects through to a final investment decision so they can move ahead. We have to crowd in rather than crowd out capital. By getting projects that were previously stuck to move forward, that private sector money gets moved in but it is not our job to go and elbow our way into projects that are already financed and do not need our money so we would be crowding out the capital.

We can invest anywhere into a project, but we are an infrastructure investor. We don’t invest in venture capital or technology, we don’t invest in project development or private equity type investments. We have an infrastructure mandate, which was agreed with Brussels when we established the Bank. We can provide capital into the debt or the equity or a mezzanine strip in a project, as long as it gets an appropriate rate of return.

When we established the Bank and we had these discussions with Brussels, we agreed with them that there were four key areas that we could invest in-the areas that needed the most capital: energy efficiency, offshore wind, waste to energy and waste recycling. We must allocate approximately 80% of our capital there, and we can put up to 20% of our capital into the non-priority sectors. Those are biofuels-it really means biomass to power for us, that is the area we are focused on-and carbon capture and storage or wave and tidal. We have been up and running now for nine months. As you said, we have just moved into this office. We were in temporary accommodation in Edinburgh before that. Edinburgh is our head office. We have about 85 people between London and Edinburgh, about 50 in London and 35 here. In our first year we committed to 11 transactions with about £635 million committed. That catalysed about £1.6 billion of private sector money on projects that were previously stuck. In total, £2.3 billion of capital was brought into the market. This year has been a bit quieter; we are off to a slower start. We have invested in two projects, committing about £70 million of capital and catalysing in total just over £350 million. Our transactions last year represented just over 40% of the market and this year just over 30% of the market in the year to date.

I hope that that is a good introduction. I am happy to take any questions.

Q77 Chair: It is a helpful résumé in terms of our questions. I want to start off with something that you have not mentioned so far but that came up when we had the session that launched this current finance inquiry at the Guildhall. I am talking about community renewable energy schemes. At that session we had evidence from Robert Rabinowitz about the impact that community renewable energy schemes can have. Since then, there has been a report by the Green Alliance policy insight looking at the potential of community energy. I would be interested in your views, given the tendency for the major power companies and so on to dominate the whole sector. Could you set out for us what help you are able to give these community energy schemes? Many Members of Parliament and constituencies all around the country want to find ways of getting them set up.

Shaun Kingsbury: Speaking personally, we are very interested in being able to participate in community renewables. When we agreed the set-up of the Bank with Brussels, they did not differentiate community renewables. They have renewables split into solar, wind, offshore wind, biomass and so on. Community renewables is really about smaller scale projects; they could be hydro, they could be solar, they could be two or three onshore wind turbines-those types of projects. Unfortunately we are precluded from investing in those areas, which we think is a great shame. We are, at the moment, preparing to go back to Brussels to try to demonstrate to them that that area does need new capital-that there is a lack of capital to support these projects-and have our investment mandate extended to participate in that. However, today I cannot, I am afraid.

Q78 Chair: Can you then set out why it is that Brussels and the definition that they have imposed on your operations would exclude this and whether the whole issue of state aid rules comes into that? I would imagine if it did then the issue of market failure would be something that you could justify investment in these community renewable schemes.

Shaun Kingsbury: Correct. They do not have a category called "community renewables"; they just think of it as onshore wind, hydro, solar. When they look across those markets, as they think about them, they see that there is plenty of capital for solar or onshore wind in particular, which are the biggest areas. We want to go back and further categorise community renewables because of its scale, the way the developments are done, the fact that the ownership is very different-they are not owned by big professional companies but by very much smaller communities-and demonstrate to them that, while there may be capital for onshore wind or solar at scale, there is not the same amount of capital for onshore wind or solar at a very small scale, such as community renewables, and hopefully convince them.

Q79 Chair: Do you have dedicated staff among your 85 people employed both here and in London who could be set to work on that task to make this case to Brussels? How much of that case is the need to have some kind of an aggregated scheme so that each individual investment, if it was part of an aggregated scheme, could actually meet much better the criteria that are set?

Shaun Kingsbury: Yes, we have teams. We would use a combination of our legal team and our Government relations team, because ultimately this is not the Green Investment Bank talking to Brussels. It is the UK Government talking to Brussels about releasing us from some of the constraints.

Q80 Chair: So it is not the Green Investment Bank that would be taking that case to Brussels, it would be BIS or DECC?

Shaun Kingsbury: We would be supporting BIS taking that case. It would be BIS.

Q81 Chair: Is the mechanism in place now for that case to be made?

Shaun Kingsbury: It is.

Q82 Chair: Who is the lead official dealing with it?

Shaun Kingsbury: From our side, Oliver Griffiths will be preparing all the work to sit down with the BIS legal team. We have our first meeting scheduled for next month in Brussels; it is already in the calendar.

Q83 Chair: Could I turn to your two colleagues? First of all, Ms Tennant, is that something you are actively supporting?

Tessa Tennant: Completely. Right from day one this has been something that I have been keen to see the Bank do.

Q84 Chair: How much of a frustration to you is it that this is not included?

Tessa Tennant: I think that the important thing is that the Bank was set a mandate-quite a challenging one-by Government and Brussels initially, and the Bank has done a very good job of responding to that mandate.

Q85 Chair: Can I just interrupt a moment? Is it the mandate that was set by Government that took the case to Brussels or is it what Brussels has actually said to Government?

Tessa Tennant: It is a combination of the two. The important thing is that we had to get on and deliver on that mandate and that has been a top priority of the Bank over its less than one year of operation. What is great is that the team is already moving into action and starting to define and push how we can get into areas that we are not currently allowed to invest in.

Q86 Chair: Mr Maxwell, has your company managed to invest in some of these community renewable schemes?

Jonathan Maxwell: As I pointed out earlier, our firm focuses on energy efficiency, which is typically associated with reducing the demand for and cost of energy and greenhouse gas emission reductions. It does touch on the area of community or district energy, so we are looking at opportunities that include provision of combined heat and power through distributed energy solutions and, as Shaun has pointed out, sustainably sourced biomass solutions for communities. These are distributed energy projects, where we can demonstrate a clear reduction in demand, cost and greenhouse gas emissions. That is my answer to the question. We are not set up as a renewable energy fund, but through our energy efficiency policy and through our looking to act in accordance with the EU Energy Efficiency Directive that promotes combined heat and power-we are certainly heavily involved in distributed schemes, including healthcare and education where there are very large numbers of people involved.

Q87 Chair: Is the principle of aggregated funding something that is on your agenda?

Shaun Kingsbury: Absolutely. We have £3.8 billion that we wish to invest over the next few years. It is very difficult to do that in chunks of £1 million or £2 million for a community project; we have to invest that in chunks of £25 million and above. Some of the transactions that we are looking at could be upwards of £200 million. We recognised very early on that, in some of the key areas where we have a mandate to invest, particularly around waste, biomass and energy efficiency, a lot of the transactions could be smaller than our target size and that they were good companies, good projects with a real need for capital. Therefore, one of the early decisions we took was to establish four funds with a mandate to invest in those areas. We effectively ran a competition. We asked them to come forward and explain who was on their team, their track record, their portfolio of opportunities and their investment strategy for investing money. We selected two groups to focus on waste and biomass and two to focus on energy efficiency. SDCL and Jonathan was one of the two winners in that. We said we would allocate between £30 million and £50 million to those funds that they had to match. They could either match it by going out and raising £50 million that would sit pari passu alongside us or they could match it project by project, so every time we were asked to draw £1 million, someone else would put £1 million beside us. We have a mechanism for targeting the smaller projects.

They are up, they are running, they are investing, but they only cover a portion of where I think you are really focused, which is a typical community energy project. There may be some biomass, we can do that today, but they tend to be one or two or three turbines or some solar, and those areas are precluded but we are working on trying to fix that.

Q88 Chair: My final question is whether your lead person could be linking up with the Green Alliance to look at how the best case could be made to get some change so that community projects could be supported. That is work that could be ongoing.

Shaun Kingsbury: Absolutely. There are a number of reports-including a new one that has come out and was launched in the House of Commons two days ago on community renewables-all of which provide really helpful background data. We have to convince Brussels not just that this is a valid sector-that is one aspect; it is really the lack of capital that we have to convince them on so that they will allow us to extend our mandate into that area. That is the case we want to make. The first meeting is in October.

Q89 Dr Whitehead: What is your anticipated timescale on that process?

Shaun Kingsbury: How long is a piece of string? My aspiration would be that we could do that in less than six months. These things are frustratingly long in my short experience of having to do it. I would hope that we have an answer before the end of the financial year in March.

Q90 Chair: I will turn to Peter Aldous in a minute to take up the issue of state aid, but finally from me, in respect of this particular issue, you wouldn’t see state aid as a blockage to the community renewable schemes at all?

Shaun Kingsbury: State aid is currently the blockage for us. That is the blockage, otherwise we would be looking at it.

Q91 Chair: But the market failure has been proven in the case of these community projects so there shouldn’t really be a problem, should there?

Shaun Kingsbury: We would hope that is the case. The last time we tried to put this case to Brussels, it was part of the original remit that we asked for the Bank, and they rejected it.

Q92 Chair: In Germany, with the KfW bank and the means of financing there and the whole different infrastructure arrangements, that is not a problem is it?

Shaun Kingsbury: KfW seems to get treated in a slightly different way. They have been around for a long time, before the European Union was in place. We will certainly look at every opportunity to push it. I am exactly where you are. I want to be in this market. I think it is a good market, a green market and a profitable market, and I think it is one that needs capital. I am absolutely committed to try to get there. It is just not something where I can wave a magic wand and make it happen.

Chair: I am sure that is something our Committee will be looking at in detail.

Q93 Peter Aldous: Just to start, for the record of Members’ interests, I have an interest in family farms where renewable energy projects are being pursued. As you said, the European state aid approval prescribes those sectors that you can invest in-we have heard those four. Just following on from the opening questions, are there any other specific sectors that are not permitted at the moment that you would like to be investing in?

Shaun Kingsbury: There are a variety of sectors where it could make sense to make investments. To give you an idea of the size of the market, if you look at the UK renewable and energy efficiency market, it is about £10 billion of the European market. The areas that we can invest in today represent between £2.5 billion and £3 billion; they change every year as projects get done and others get waylaid. It is 25% to 30% of the total market. There are other areas, therefore, in that market where we would see an opportunity to invest. It could be that we could look at low carbon transportation. We never had a chance earlier, but downstairs there are charging stations for electric vehicles, and rolling out infrastructure for that in the UK is an area where it may make sense to invest. We have talked about community renewables. There could be areas in the supply chain. The difference between the £110 billion that we need for low carbon generation and the £200 billion includes the build-out of other infrastructure like interconnectors and supporting grid, port facilities, installation vessels for offshore wind. All those could be deemed to be lower risk infrastructure-like investment that could fit with our investment style and our knowledge of the market but are currently precluded. We are in the process of producing that list. Our plan is to go to see Brussels in October, talk to them only about community renewables-that is the key focus for that meeting with the case already done-and then give them a list of other areas that we would like to come back and talk to them about. We are keen to be able to play a bigger role in expanding our green remit.

Q94 Peter Aldous: Just taking one thing, investing in the supply chain, what were the reasons given in the first place for precluding you from investing in that area?

Shaun Kingsbury: They believed that in general there was no shortage of capital. That was their view.

Q95 Peter Aldous: Do you agree with that conclusion?

Shaun Kingsbury: It depends which parts of course; the devil is in the detail. There are pieces of that where I am sure there are adequate amounts of capital and other pieces where there are not. Interconnectors, for example, is an interesting area. I was asked questions at a Scottish Select Committee on that last week. The Islands are keen. They have the potential to produce large amounts of renewables and need interconnector support. That is an area we would love to talk about. There are opportunities to import renewable energy from other countries such as France, Ireland, and even from Iceland where there are large amounts of geothermal. Investing in the interconnectors that would bring that on, maybe at a cheaper price than some of our own internal resources could produce, seems to make sense to me. These are the areas we need to look at.

Q96 Peter Aldous: Within the sectors you are working in at the moment, how do you devise your investment strategy?

Shaun Kingsbury: We take a bottom-up approach from those three big areas. We put waste and biomass together-it is combustion technology-we have offshore wind, and then we have energy efficiency. Let me describe offshore wind. We have gone out and talked to all the developers. It is a fairly concentrated market and we know everyone who has a project. We get the full list. We decided to start in an area where we thought we could bring in more capital with us. That was to buy into or finance operating offshore wind farms, on the condition that the utility would reinvest the money in construction. So we could either invest in construction or we thought we could bring more people with us, and indeed we have. We have provided debt for a refinancing of the Walney offshore wind fund, we have recently refinanced Masdar and its London Array project, and we took a direct equity investment alongside a fund called Greencoat Capital in the Rhyl offshore plant. On every occasion the utility that received the capital-some from us, a lot from the private sector-has committed to reinvest that.

Q97 Peter Aldous: Is a condition of the lending that you have to reinvest?

Shaun Kingsbury: A condition, absolutely a condition. We are starting to look at the next round of projects. There are seven or eight that are on our radar, which could be committed to in the next six to nine months. We are in discussions with them about providing equity capital to take construction risk. What we are trying to do is make those markets work. We worked with BIS to help establish a listed entity called Greencoat Capital that would invest in both onshore wind and offshore wind. The rationale for that is there is a large chunk of capital that can only invest in listed equities. About 30% of all our pension funds are invested in listed equities, about 50% in bonds and very low yield, low risk securities. The piece that would typically go into investing in offshore wind is a very small part, part of the infrastructure bucket, and it is maybe 2% or 3%. We want to target that 30%, so we helped a company called Greencoat-who had an opportunity to invest in projects-to create a listed fund. Several of the members of Greencoat had tried this a couple of years ago and they had been unable to raise the capital. We came in and helped restructure that in terms of which assets they should buy-a combination of offshore wind and onshore wind-to prove that offshore was investable.

We brought that team and its fund management business onshore in the UK, so it is now based in London fully paying tax. We also took it from the AIM market, the junior market, to the main market, the main London exchange. We committed £50 million-the money will come from BIS but we helped to arrange it-of capital into that. It was a very successful IPO. They raised more than £260 million and it was the largest green IPO in the world in the first half of the year. More importantly, since they were successful a number of companies have copied their model, taking slightly different assets-some UK, some European, some onshore wind maybe mixed with solar, slightly different varieties of it-but the concept has been firmly established and we now have capital markets working to provide long dated capital for this asset class. That is an example of how we targeted offshore wind, the different types of investment strategy and then something we have done in capital markets. We are doing similar things in waste and biomass and, of course, energy efficiency as well.

Q98 Peter Aldous: Can you elaborate on what you are seeking to achieve in energy efficiency and support for the Green Deal and how you think it is going so far?

Shaun Kingsbury: Energy efficiency is probably the area in which we would like to invest the most amount of capital we could find, the rationale being that it is hugely sensible as it really does take down energy costs. It does not require any form of Government subsidy or support mechanism, and it is probably the greenest thing we have across all the areas we invest in. So it is a huge area of focus. Unfortunately, it is a very nascent business, it is very new, people are just establishing it and we cannot find sufficient deals to do. This is one of the reasons why we understood they would be smaller and we established the two funds. Jonathan, I will let you talk about energy efficiency in just a second. We are looking across combined heat and power, building retrofit, smart meters, all those areas.

One of the areas where we have had some success is in establishing a fund with Aviva-they are a large insurance company based in the UK-to target energy efficiency in NHS hospitals. The first project we did, which we hope is a marquee transaction that can be copied again and again, was in a hospital in Cambridge called Addenbrooke’s, where we put in a £35 million investment in energy efficiency. We replaced old coal boilers with modern CHP biomass fired boilers. We put in heating and cooling systems, a little bit of district heating, and some solar and a number of other systems that bring the energy consumption down. After paying for all the financing of this, it saves the hospital about £1 million a year, which can then go into patient care.

Jonathan, why don’t you talk a little about where you are focused?

Q99 Peter Aldous: I will come on to Mr Maxwell; it is an appropriate opportunity there. The Green Investment Bank has invested an estimated £50 million in your fund. What parameters has the Bank set as to how you use that funding?

Jonathan Maxwell: The summary that I gave before in terms of the requirement to finance projects that reduce energy demand, energy cost and greenhouse gas emissions. We have some limits, some metrics to hit in terms of investment per tonne of carbon abated, which are on our website. I can go into the statistics another time.

Going back to Shaun’s point, the key for us is how to achieve energy efficiency at scale and the means to deliver that is through creating and improving business models that are replicable and getting transactions done. We launched our fund with the Green Investment Bank last September and there are four key areas that we are focused on. One is buildings retrofit, the other one is combined heat and power-which includes hospitals, which I will come on to in a second-and renewable heat and what we call urban infrastructure. In the buildings retrofit sector, we have been successful at developing and investing in energy efficiency projects, particularly in the industrial space in the UK. Currently we have £50 million by the Green Investment Bank and the £50 million of co-investment that we have been mandated to raise in conjunction with it. We currently have deals at term sheet stage; we have £75 million worth of projects in the UK.

Q100 Peter Aldous: Do you believe that the Green Investment Bank’s investment is making it easier for you to get that additional investment?

Jonathan Maxwell: Incredibly so. There are two elements that are very catalytic for us, one of which was the initial capital commitment from the Green Investment Bank that was a stimulus to encourage other investors to come on board with us. That is UK institutional investors, but also I am very pleased to say that we have international investors from Europe and even further afield. The opportunity to mobilise private sector capital at scale was critical. The second thing that really helped us was the profile of having the Green Investment Bank behind us to target the key areas. I will go through a few examples. In the buildings retrofit space we have been successful at making investments in the UK building efficiency sectors. It is a brand new sector. There is nothing like the amount of capital being invested in energy efficiency as there is even in the renewable energy markets. This is a brand new marketplace. We are very much, with the Green Investment Bank, making the market, designing the new financial and contractual structures to get projects done. Once we have proven our model-we announced a project earlier this financial year where we are retrofitting a major factory in north Wales with energy efficiency equipment, reducing energy demand, cost, and greenhouse gas emissions-we are then able to replicate it. In July we announced the launch of a partnership with the Buildings Research Establishment to marry our capital up with standards here in the UK so that we can roll out energy efficiency projects at scale, using models that are proven.

We are taking a very similar approach in the combined heat and power space. We are partnering with a number of absolutely leading suppliers in the energy supply space, equipment manufacturers as well as energy services companies. An example is a partnership we have announced with GE and the NHS confederation to retrofit hospitals across the UK with energy efficiency solutions, concentrating to start with on combined heat and power-to go back to the Chair’s previous comment-in hospitals, even in universities, where community benefits are significant.

The third area is renewable heat. Again, we are partnering there with local developers, with the local supply chain, to deliver local, sustainable biomass renewable heat projects.

The last sector for us is what we call urban infrastructure. This is where we get into district energy, hopefully in the near future street lighting projects and even into the smart energy space. Our strategy is about identifying and delivering replicable solutions that might individually be small scale but in aggregate can make a huge difference.

Shaun Kingsbury: Let me add something about how we try to solve these. You mentioned the word "replicable" and I think that is the key. We are breaking new ground. It is important that we create structures in the transactions we do that other people will recognise and be able to repeat. My Greencoat Capital example is a good one. We frequently find that people bring us projects and say, for example, "We have an offshore wind project and we would love to finance it but we are worried about refinancing risks, so if you could just take that away from us and guarantee you will underwrite us for six years, that would be really helpful. If you could underwrite the power price for us, if it is a ROC project, or guarantee beyond the CfD period, if it comes under the new regime, we would be very happy." If you could take away all of these risks, there is a lot of capital that would be available. We have said that is not our job. All that we would do if we did that was invest our £3.8 billion, probably, frankly, lose a lot of it, because we would have taken on the risks that nobody wanted, and all that we would be able to demonstrate is that the renewable energy business is full of risks and no one knows how to make any money.

We don’t want to take away the risks from the market; we want to help solve the risks with the market. We want to find solutions, where the people best able to take the construction risk should take the construction risk and the people best able to take the technology risk should take the technology risk. If we can get those structured, and it means the first transactions take a huge amount of time and effort, and get the risk allocation right and then demonstrate we are serious about it by putting large chunks of capital alongside it with the right risk adjusted return, then other people will come and repeat, just like they did at Greencoat Capital. They repeated the piece of work we did. It took us six months to restructure it to take it to the market, to find a book runner, to get all the equity players, but after we did it, the market took over and did it again and again because it was a demonstration that this worked. What you are doing, and spending a lot of time on, is getting the contractual structures right, getting the legal documents right so that the first one might take six months, but then the next one takes three months, the one after that two months and then we are away. It happens on the small side and it also happens on the big side.

Q101 Mr Spencer: If we come back in five years’ time, will you have backed every project to fail?

Shaun Kingsbury: It is possible that some of our investments will not have performed. It is entirely possible. I can’t sit here and tell you that everything we do is without risk; that would be untrue and unfair. The risk varies, depending on the type of project we are investing in and where we sit in the capital structure. If we take a geared equity risk, it means that our equity sits behind the secured debt so if the project is not a complete failure but it performs below the level that we expected it to then the debt may get paid and the equity would see a lower return than that which is projected. If we are sitting in the debt in those situations, we have no upside but we have a lot of downside protection. We are investing against a portfolio of technologies and a portfolio of sectors. We have senior secured debt, mezzanine, equity, geared equity and increasing amounts of risk. When we look across a balanced portfolio, we will undoubtedly, looking back five years from now, have some projects that were huge successes and some that failed to perform to the level we expected. Overall I expect this to be very profitable but it is not that there will not be situations where, frankly, something did not hit the numbers we said it would. We are taking risk, but we are doing it in a very thoughtful, structured and controlled way. It would be wrong if I said we had excluded all the risks as a result; that would not be fair.

Q102 Peter Aldous: Coming back to another of your loans, to the Green Deal Finance Company, the £125 million, what were the aims behind that loan?

Shaun Kingsbury: As you know, the Green Deal Finance Company has two pieces to it. There is the services company and the asset company. The services company goes out and secures the loans, works with the contractors, gets the work done. The asset company then buys those loans, effectively, from the contractors. We only provided capital to the asset company. So we made it clear we are a bank, we provide capital, we do not run the Green Deal Finance Company, we are not an equity holder, we do not sit on the board and we wanted to separate out the various risks, the risks of not hitting the numbers, the risks of potentially mis-selling, the risks of non-payment. To be honest, nobody knew at the beginning of that programme whether the customer uptake number would come to fruition, whether the delinquency and payment numbers would come to fruition and whether the default expectation they had of people who just would not pay would come to fruition. We said, "We do not want to be financing your services company, you have to run that. We want to finance the asset company and, because these things are unknown, we will treat this much like we would a project financing where we will be willing to provide senior secured debt, in other words our investment when drawn would be secured against the assets, the loans to each of the householders. But because all these things are unknown, and frankly unknown for a lot of the time, we want a buffer where we see equity put in. 30% of equity has to go in first and that will be drawn first." So imagine if they did not get the sales numbers-it would mean that we would end up with 80% equity and only 20% debt. We would be very well covered.

We also said that we wanted a period of 18 months to see how it goes before we would extend the loan, change the terms, bring in someone else. We took a very thoughtful structured risk approach to establishing how we lent money to that company, safe in the knowledge that, if it did not perform-and we hope it does perform, we hope that it goes well and it is a great idea to try to drive energy efficiency-that the capital that we have lent or will lend is secure. Just to be clear, none of it has been drawn yet as it has not been needed.

Q103 Peter Aldous: You said has not been needed yet. That does raise the question of could the finance company have secured the finance from somewhere else?

Shaun Kingsbury: I don’t believe so. They talked to us and to the European Investment Bank and we agreed we would allow the EIB to come in. So if it was a roaring success and lots more people than we expected took up this opportunity we would allow the European Investment Bank to come in beside us on the same terms, even though they are coming in a little bit later. The reason it has not been drawn is they have not used the equity portion-the 30% of equity that was put in first has not been needed yet so they have not drawn our loan.

Q104 Peter Aldous: Do you think your loan will allow lower Green Deal interest rates to be offered to households?

Shaun Kingsbury: The cost of that capital, when you go through the cost of our capital and administration cost on it, is just below 7%. I think it is 6.96% or something like that. When you compare that with some form of secured lending, it is a little bit more expensive, so if you had a mortgage secured against your house maybe you would be paying 4.5% or 5% today; if you looked at it against the unsecured loan for a home improvement or a car, it may be 8% or 9%, so it is cheaper than that. It sits somewhere in the right range, we believe. Those are the thoughts we had on it.

Q105 Peter Aldous: Moving on, the Government has set up the guarantee scheme to help get stalled infrastructure projects moving. Are you able to provide guarantees as well?

Shaun Kingsbury: We are able to provide guarantees. We have not used that tool so far. We can use any financial tool in any part of the capital structure and we have worked with Infrastructure UK on, for example, the financing of the Drax coal to biomass conversion and we may work with them on other projects. We work closely with them; we are in contact with them the whole time. They may provide a debt underwriting to a project that then is debt covered but is short of equity and we can provide the equity.

Q106 Peter Aldous: Surely there is some duplication in the case you have mentioned, in respect of renewable energy projects you are involved in anyway.

Shaun Kingsbury: Duplication in the sense that they could provide capital and we could provide capital? Yes, but typically we tend to work together on it. They can provide debt guarantees-that is the only tool they have-but we have more flexibility in the ways we can provide the capital. If they go in and it is a project where they would like to provide a debt guarantee, it means that the lenders are not looking at the project, they are really looking at the guarantee. It extends the market of people willing to lend money because they do not need to be experts in biomass or waste or whatever, they just need to accept the credit guarantee from Infrastructure UK. That will mean there is no need for us to play a role in the debt side but then typically we will look at a mezzanine strip or an equity strip, otherwise, frankly, with those we felt were good-where we do not need to touch that project-we wouldn’t crowd in capital effectively. But we do work with them, it is co-ordinated and I don’t feel it is a challenge or an overlap or anything like that.

Mark Lazarowicz: I have a question about the European approval for sectors, and it is a good time to ask this question. First, two preliminaries. I welcome the Committee to Edinburgh. I am pleased to see you here. Secondly, I have also to declare an interest-in the Edinburgh Community Energy Group. It is a voluntary and not a pecuniary one, but I should declare an interest in it at this point.

My question is in relation to the European restrictions. One of the areas where there is a major impact of carbon emissions is the whole transport sector and one can see all sorts of areas of investment. You mentioned electric vehicles. I mentioned earlier extending the Edinburgh tram. We had a debate in Westminster on cycling, about funding cycle schemes in London. There are a large number of what would seem obvious areas in which you would want to invest, but do I take it you just cannot invest in transport full stop? Is that the situation?

Shaun Kingsbury: Yes, I am afraid at the moment with the restrictions we have it is not one of our permitted sectors of the four areas of focus and the three areas of non-priority sectors. But, like you, we agree there are areas of that that are good projects. The projects are both green and profitable and there is no reason why we could not provide capital. We just need to go and convince Brussels that that is the case.

Q107 Mark Lazarowicz: The second question following on from that is that I understand from preliminary discussions that one of the reasons why you chose or agreed with the four major sectors with Brussels was that they were relatively non-controversial and Brussels didn’t want to get involved in a long discussion that delayed the whole establishment of the Bank, if that is fair to summarise what we discussed earlier. Would it not now be sensible to make the case, even if it is quite extensive, that negotiation is required for areas like the transport sector, and maybe others as well, precisely because you will be restricting yourself from major areas if that is not changed? Is that something that the UK Government should be trying to work on with you, if necessary lobbying to do so for quite a considerable period?

Shaun Kingsbury: Yes, I think you are right. With all these things, you can get to a perfect answer that might have taken an extra six months or a year to do-it would have meant that the Green Investment Bank would not be functioning today, we would still be three months short of our launch-or take a more pragmatic view, which was to get started on the areas that needed the most money. That is the view that we took. I think that was the right view. It means that nine months ago we were established, we are up and running, we have hired our people, we have made £700 million of commitments, there is £2.5 billion of new capital gone into the market that would not have gone in. So, was that right answer? Yes, I am pretty sure that was the right answer.

But you are quite right, now is the time to go back and look in more detail at some of these areas-to look at that portion of the market that we believe is both green and profitable but we cannot invest in-and have the discussion. I completely agree.

Q108 Mark Lazarowicz: Just briefly on one factual point, on the non-priority sector, 20% of your portfolio, you mentioned the three areas, where you are restricted to those three non-priority areas-

Shaun Kingsbury: Correct, and just for the record that is all wet renewables, wave and tidal, carbon capture and storage, and biofuels.

Q109 Dr Whitehead: Just before we move off the question of EU and investment criteria, will they possibly take a view when you go and see them that some of the bodies you are investing in are migrating the funds to things other than the priority areas? For example, Greencoat, as you mentioned, is investing in a system called Aveillant, which is a radar system to prevent planes from mistaking wind turbines for aircraft. That definition is outside your end investment but you have invested in a company that is doing that.

Shaun Kingsbury: Greencoat has a number of funds. The bundle I mentioned was their infrastructure fund and we did not make the investment; BIS made the investment. We advised BIS, we held their hand, we had the idea, but because that investment included onshore wind as well as offshore wind we were precluded from making that investment ourselves, so BIS held it. BIS still holds that investment in Greencoat, but that is purely in their infrastructure fund. They have a number of funds, some of which do technology investments. I am not aware of that specific investment but, yes, I am aware they do other things. We didn’t invest in Greencoat. We put capital as a limited partner into their infrastructure fund. BIS put that capital in and we advised them.

Q110 Dr Whitehead: So capitalisation is okay?

Shaun Kingsbury: Yes.

Jonathan Maxwell: Just as a point of fact, the investment that the Green Investment Bank, as an example, has made into our fund is governed by a limited partnership agreement that is very specific in terms of what investment policy and criteria we have to abide by.

Shaun Kingsbury: Which is consistent with ours.

Jonathan Maxwell: Exactly.

Shaun Kingsbury: So you can invest only in the approved sectors.

Jonathan Maxwell: Correct.

Q111 Dr Whitehead: Perhaps we can move to the ability of the Green Investment Bank to borrow. We hear 2016 is the date at which you can borrow but, as we have discussed informally, the question of borrowing remains on the books. Is 2016 a date you think is about right for that process or would you like that to happen earlier? If it does happen earlier, what would be the terms under which you think it would be best that the Green Investment Bank might be able to borrow?

Shaun Kingsbury: There have been a lot of questions around our ability to borrow ever since I got here nine months ago. I decided I wouldn’t publicly engage in that discussion because with £3 billion and now £3.8 billion we have plenty of initial capital and my focus as the CEO of this organisation is to build a successful organisation, a green and a profitable company that can demonstrate the value of investing in renewable energy projects in the UK. My view has been that if I am successful in that and we do build a very green and profitable investment bank here, there will be lots of sources of capital open to a profitable and successful company, one of which would be debt. We would like to borrow at some point in the future, but right now I have plenty of capital.

To put it in context, we have a concentrated area of focus obviously with what we do so we are not like one of the large retail banks that has 3% to 5% equity and 95% of debt. When we think about borrowing we would be geared 50:50 or one third equity, two thirds debt, but it would allow us to deliver on our goal of capitalising private sector investment. That money coming in in the form of debt would be private sector money that we could deploy and invest and see a return on. So, is 2016 the right time? It is in and around the right time. We have plenty of capital now and I am focused on making really good investments, building a successful company here and then we will see a variety of ways, one of which is debt, to raise that private sector capital.

Q112 Dr Whitehead: The question of borrowing, which then goes back to Treasury, is firstly the Treasury definition of when the Green Investment Bank becomes a bank as such and we have a formula there for the amount of debt falling to-I can’t remember the exact wording.

Shaun Kingsbury: A smaller percentage. It is debt volume as a percentage of GDP.

Dr Whitehead: Yes. The prospect of borrowing has been advanced a little from that particular definition but, as we have said, this remains on the Government books. Obviously one issue relating to that borrowing and the definition is the question of the extent to which the Green Investment Bank then becomes off the books in terms of its borrowing. Does that, in your view, take the form of-in your words-crowding in of investment rather than crowding out, bringing partners in or simply having, you might say, a proto-borrowing fire sale of Green Investment Bank at a particular stage in order to get all the circumstances right, at which point the Bank becomes a bank and the borrowing becomes real?

Shaun Kingsbury: Yes. I think the key challenge around borrowing is there has been a big focus, as you all know much better than me, on reducing Government debt at the moment and while the Bank remains a 100% subsidiary of the Government, owned by BIS as you know, any borrowing done by the Bank represents borrowing by the Government. It is on balance sheet. If the Government owned less than 50%, the accountants would likely say that is 40% or 49%-that will be, I am sure, a great debate should that time come-then borrowing would be off balance sheet. Borrowing done by the Green Investment Bank would no longer show up on the Government books as borrowing by the Government. Could we get to that point in four or five years? Who knows, it is possible. We are certainly migrating and our vision for the Bank is to create an enduring institution. Our vision is not to invest the £3.8 billion and then kind of disappear, having hopefully solved some of the problems. If we are going to have our maximum green impact over time it is in creating an enduring institution and the key to that is to raise capital.

We want to be able to raise capital from the private sector, that is the whole point. We can raise that capital in a number of ways. We could raise an equity fund, go into the fund management business. Nothing precludes us from doing that at the moment. We could raise private sector money by borrowing, and that is on the table in and around the dates that you suggest. Eventually we could migrate the Bank from being public sector owned and public sector financed to being public sector owned and private sector financed. A natural step in due course might be a combination of public and private sector ownership, but is that a focus for where we are at the moment? It is not. Could I see that in a number of years when we have built a successful business? Potentially, yes, but we are starting to look at those ways of driving in private sector money before the transaction. So, rather than doing it deal by deal, we could go out to folks. We have a tremendous team, probably the biggest and most experienced renewable energy team here in Europe. We could manage other people’s money on the back of that.

Q113 Peter Aldous: Just very quickly, on the ability to borrow, I think you said that 2016 was in and around the right time and you had plenty of initial investment capital to get on with it.

Shaun Kingsbury: Yes.

Peter Aldous: At the current time with EMR, particularly with regard to offshore wind projects, there is a little bit of a brake on investment and potential stream of work. If EMR goes the right way, next year that brake could go off and the foot could be hitting the accelerator from the investors big time. In that scenario, would you either need some more investment capital or would it be appropriate to say that perhaps we should be looking a year or two earlier than 2016?

Shaun Kingsbury: All these things are possible. We are very hopeful that when we get to the end of this year and the EMR process is more or less complete, all the documents are available, the prices are finalised, people will understand and I hope will feel very comfortable, we could see an increase in investment levels. We are certainly seeing a bit of a hiatus at the moment, not unexpectedly. But of course if that happens there may be a lot of additional capital, which means that instead of having to put one part of our money to three parts of someone else’s, it may be one part of ours to seven or eight parts so our initial capital may go further. We just have to wait and see.

Q114 Dr Whitehead: Yes, but which way round do you view that or might you view that occurring? At the moment we have a great deal of detail to sketch in the EMR and we have a potential hiatus, for example, as a result of the question of financial closure decisions relating to whether you go for ROCs or CfDs on wind, particularly offshore wind, whether you go for investment instruments in order to secure your position on CfDs or whether you try rushing investment to get in early. You could conceivably be seen as the bridge as far as that hiatus is concerned. The fact that you are coming in and sorting those decisions out could itself be the bridge over that uncertainty. On the other hand, you could say, "Well, actually, we are going to pace our investments in order to deal with the arising of certainty over that period". Do you see yourself as a positive saviour of uncertainty or a surfer on uncertainty for the future?

Shaun Kingsbury: I am not sure I see it either way, to be honest, and I am not avoiding the question on that. We see a number of projects on offshore wind teed up and ready to go. Some might catch the tail end of the ROCs regime if they take a decision literally within the next couple of months. Others are already CfDs and they have the choice, as you said, of taking the numbers on the table now or waiting to see how those numbers progress as they get finalised through the consultation process. We are engaged with seven or eight projects that are in the category of things that are reasonably ready to go, and we are talking to them about the type of capital they need, the role we could play and when we would be in position to take an investment decision. I guess in a perfect world you would love to be able to turn over all the cards, understand exactly what hand you might have and select the ones that would work best. We will do the transactions that are in front of us and are ready to go as long as they meet our investment criteria, meaning they are both green and profitable.

If we see a project that has secured all its capital except for a piece of it, and they are ready to go, they really are ready to commit that capital, rather than risk the project getting delayed, getting shelved and maybe not coming to the market or not coming to fruition, we will lock in that other capital by making the investment we need to make. I can see us making our first commitments over the next six months to construction capital or existing commitments in offshore wind including refinancing operating wind farms or taking equity positions, on the condition that money is invested in the next round of offshore wind. But I hope we can make commitments in the next six months. We will do the projects that are ready to go that fit our investment criteria.

I guess we will look back in 18 months or two years and we can decide where we were a bridge, a saviour of security or we were helping the market. I honestly don’t know what the answer will be.

Q115 Dr Whitehead: Do you have a view-and I guess you do in terms of your analysis of these matters-on the size of the stuck market in these matters? So taking, for example, the upcoming offshore wind market over the next period, one can say that, probably for the reasons we have discussed, a good proportion is potentially stuck and then you will presumably have an analysis of a number of other stuck markets in the other sectors you are dealing with. What is the overall size of that in your view?

Shaun Kingsbury: I don’t remember off the top of my head but let’s talk about offshore wind, which is the cleanest, it has the fewest projects, you can get your arms around it. The six or seven projects that we are in discussions with are £500 million up to just north of £2 billion. So it is several billion pounds of investment that is waiting on the answer for sure in that sector, and I am sure that it is probably a smaller number in other sectors. Jonathan, you might have a view as you do some consulting work as well, outside the investment in offshore wind.

Jonathan Maxwell: Sure. While we only invest in energy efficiency, we advise on a range of renewable energy and environmental infrastructure projects. In the offshore wind sector in the UK we act as an adviser to a very large offshore project, very close to here, in Scotland, the Neart Na Gaoithe project, which is a 150 MW development and a good example of this concept of capital mobilisation. It is going to require approximately £1.5 billion of capital, so absolutely in Shaun’s range. It is going to require a series of features to come together at the same time over the course of the next year post consent, which is expected in December. Those include drawing on Government instruments, international sources of finance from DECC, both from public and private sector, working closely with Infrastructure UK on the debt side, working closely with Green Investment Bank on the equity side. I think this concept of a bridge that you have referred to is very interesting because these projects do not happen overnight. They are a series of planned actions that are part of a process. As an observation, I have seen Green Investment Bank’s participation in early stage discussions as pretty fundamental to these projects coming together. Equity consortia, debt consortia have to merge and form around any kind of market incentive that falls out of the EMR process, whether it is ROCs or CfDs that are selected. So I think the concept of the Green Investment Bank playing a role as a bridge is a very acute observation and certainly something that I have noticed in the market.

Q116 Dr Whitehead: It is interesting that you say that. In terms of the seven projects the Green Investment Bank is involved in that are potentially stuck, round 3 projects, that is the majority of round 3 projects?

Shaun Kingsbury: It is. There are also some around round2.5, at the tail end of the second round, that are in that category.

Q117 Dr Whitehead: My point is that you are sitting on the majority of stuck projects in terms of getting round 3 away, with all the consequences that that has, and no one else is. So you turn yourself around into the position of being a policy influencer rather than a policy follower at that point. Does that make you feel less or more comfortable about what you are doing?

Shaun Kingsbury: When you put it like that I think it makes me feel less comfortable. We are very clear on the role we play. Do we spend some time talking to DECC about where we think pricing should be and those types of things? Yes, we do. Do we have a good idea about who the potential foreign direct investors are, because some of this money is going to have to come from outside of the utilities, maybe the majority that are operating here in the UK? Do we know where they are, do we know what their aspirations are, do we understand their cost of capital? Yes, we do. How do those types of investors-and, Tessa, I may pass on to you to talk about how foreign direct, particularly Asian, investments, an area you are familiar with, feel about investing in the UK. They generally have very good levels of comfort but when you sit alongside an investor as the Green Investment Bank, investing in the same piece of capital on the same terms as you have and you know that that money is from the Government, it helps bring credibility and stability to those discussions and that is very helpful. So we are very aware of that role that we play. We do have views on things and we share those privately with DECC so that they understand where we think the market is, but we are restricted in what we can say. We are a commercial organisation, we sign non-disclosure agreements with our counterparties, they have to believe and understand that we take those things very seriously, which of course we do, so we don’t disclose information or anything like that. But do we have opinions on things? Yes. Do we provide that? Yes, we do.

Tessa, it may be interesting to get your view on Asian investors because they are one of the categories that are coming in.

Tessa Tennant: Yes. It is very exciting to see the interest that is coming from Asia and if you scroll back to the beginning of the noughties it is fair to say that there was very little, if any, interest from that part of the world in green finance at all, let alone having an appetite to invest outside domestic economies. I have been very involved since the early noughties in a major exercise in education around the region to get sovereign wealth funds, the emerging pension industry-if it is not already, it is becoming one of the largest pension industries in the world and some of the largest funds globally are in Asia. So there is now capability that there wasn’t before and the Bank is building on that. There is a congress that the Bank is organising for late October to invite some of these large assets owners to come over, who are very interested in how the Bank is being set up and how they can interface with what is going on here. So I think the Bank is incredibly catalytic, not just in terms of opening up stuck markets in the UK but opening up this whole area internationally.

Q118 Dr Whitehead: A final easy question, I guess. In terms of the relationship between loans and equity, and you have talked about how the Bank wants to look at that in terms of its own strategic move forward, is that and would that be determined over the future period by the extent to which you can get the money back and invest it in other projects or are there other criteria that determine that ratio? Depending on what your criteria are, to what degree might that then affect the extent to which you can unstick stuck projects in the way that you might want to?

Shaun Kingsbury: One of the great things that a lot of thought went into when we established the Bank was the ability to invest anywhere in the capital structures. If we had restrictions-we can only do a certain type of debt of or we can only provide equity-that would set some challenges. But it was very thoughtful that we were allowed to invest anywhere in the capital structure as long as we get an appropriate return on our investment.

When we look out at each sector and we think through where we need to invest, it is different. Energy efficiency will involve a lot of debt, I suspect, to put equipment in. Sometimes that will take the form of lease debt, so it is 100% debt on a piece of equipment, sometimes it will take project financing kind of debt. When we think of offshore wind and refinancing, we have taken a view that is mostly debt but when we think of new construction, that is going to be mostly equity, because that is what is missing. Waste falls into two categories in a way. We didn’t think we would have to play a role in the big PFI PPP projects. They are very well financed usually, very large companies, take four or five years to develop, hundreds of millions of pounds going in, but we found that, as projects were nearing financial close-they had been started four years ago maybe, prior to the crisis or just after it-banks which had joined consortia and had offered 15 year capital for a 25 year waste supply agreement-a 25 year project-and now that the project was finally through planning and really ready to go, they had to withdraw because of the liquidity crunch, which is still there in the market. They are saying they could provide seven year debt and are no longer in a position to provide 15 year debt. So in those situations we would then have provided the 15 year debt. So we have a flexibility-

Q119 Chair: How does that tie in with your concept of additionality?

Shaun Kingsbury: The project would not have gone ahead because it was stuck. Originally it was properly financed. There were five banks in the consortium, each doing £50 million, say, for a £250 million package. If one or two of them fell out, the project is completely stuck, the money wouldn’t be invested. If we go in and fill the gap where they had retreated, because the project developer did not want seven year money, he wanted 15 year money, we provide it on exactly the same terms as the other banks which are still in that consortium and therefore crowd in not just the debt package but all the equity that would have gone with that because the project would have failed.

Q120 Mr Spencer: I shall speed up, Chair. You have been very clear that all these projects have to be green and they have to be commercially viable. Leaving the green to one side just for a minute and focusing on the finance, can you give us a flavour of how you balance that risk and return? What is the formula for how you analyse these projects in terms of the return you expect and the risk you are willing to take?

Shaun Kingsbury: One of the great things about setting up the Green Investment Bank is we have an opportunity here to build a team who are truly experts-deep subject matter experts-and to build a team between London and Edinburgh, which is already going strong. We see today almost all of the transactions in the UK. We may not see things that are already financed and up and going where they don’t need our money. One of the best ways I heard one of my team members describe it is that 18 months ago, when we were talking about the Green Investment Bank, people said, "If you’re talking to the Green Investment Bank, you must have a problem". Today they say, "If you’re not talking to the Green Investment Bank, you must have a problem with your project", and that is a nice way of thinking about it.

So we understand, if we are looking at a biomass combined heat and power project, what technologies are used in all the others? We understand what the debt and equity structures were on the others. We understand what the real results are likely to be, not the first model when someone tells you, "This thing will run, it will never have any downtime". We understand what the real experience of running these things is. We understand what other transactions have been done, so if they are debt, what is the cost of that debt? It depends on how much of it there is and on the gearing ratio. If it is an equity return, geared or ungeared, we know what it should be, because we have done many of them before. The way we make sure that that we don’t get out of sync with the market is very simply that we always co-invest with others. We will never take 100% of the debt position or 100% of the equity. As well as having this market knowledge, someone co-invests on exactly the same terms that we do always. We need that to prove to Brussels our compliance with the market economy investor principle. Brussels can come at any point and audit any of our transactions, so we are always very clear that we have documented that the project went out and tried to raise capital and could not-we are additional, going to back to your question. Then we document what the terms of the loan or the terms of the equity are and we never take more than 50% of the equity. We might be able to take a little bit more of the loan but never more than 50% of the equity. We show that others are investing on exactly the same set of conditions. That demonstrates we are at market. So, there is a combination of other people being with us, which gives us great comfort, and a great depth of market knowledge.

Q121 Mr Spencer: Is there a sliding rule, though, in terms of the bigger the risk the bigger the return you expect?

Shaun Kingsbury: Correct. The least risky things we would do would be a very low geared senior secured piece, debt. A little piece of debt in a very big project would be the lowest risk and that may be a few hundred basis points over gilts. The next most risky thing we would do might be ungeared equity, because we own the whole project, there is no debt in front of us, and for those projects it may be the 7% to 10% kind of range you would expect. When we are on ungeared equity, where there is a piece of debt in front of us, it just depends how highly geared it is, but those returns could be anywhere between 9% and 15%.

Q122 Mr Spencer: Do you keep those returns? Do you keep the investments your fund managers are making?

Shaun Kingsbury: The investments the fund managers are making, they pass our capital back to us and we keep it, but you have carried interest so there is alignment. You have a fee that effectively says the better you do, you can keep a little bit more of that, so we are all aligned in driving and optimising the profit. If it is a direct investment, which is the vast majority of what we do, we own that debt piece, we own that equity piece, and all the returns come back to the Bank.

Q123 Mr Spencer: Are those fund managers aware of the rate of return that you are expecting?

Shaun Kingsbury: Absolutely.

Jonathan Maxwell: I am pleased to say that, under the structure of the fund, one of our jobs is to price correctly the investments that we are making. I suppose it applies to the Green Investment Bank in general, but certainly it applies to us as a manager on its behalf. There are three fundamental things we do. One is we figure out the right solution to the problem. We do not want to be a solution looking for a problem. We want to understand what the problem is and then apply the right type of security, if it is a debt or equity instrument, to solve that problem. But I am afraid capital is only one of the three fundamental things we have to do.

The second one is really to help the projects. We have talked today about the work that needs to be done to develop and structure a project correctly, manage it through construction and make sure that the right contracting protocols are in place. Maybe on that point I would ask you to imagine what it would be like if the UK was full of mortgage banks with no developers or construction firms or utilities that could build or operate houses. So we have to build the ecosystem, we have to help create these projects.

Then the last thing we really do, to answer your point, sir, is take risk, but take risk in a way knowing that we can manage that risk actively out of the project. We have to identify the risks involved with anything that we are doing and be comfortable going into the project that we are able to set a protocol to mitigate or eliminate those risks through the construction process. Pricing is one of the functions of being able correctly to structure the deal from capital, put in place the right mechanisms to make the project happen and then correctly manage out the risks.

Q124 Mr Spencer: What about the risk here still? If I am going to build an anaerobic digestion plant, it is fairly established technology, it stacks up because the funding is there and the support from Government. What if I have a nuclear fusion plant that is going to be the new technology? Surely people would say, "That is what you should be supporting, the stuff that is going to make the next link". Have you invested in nuclear fusion plants?

Shaun Kingsbury: I was going to ignore the suggestion, just so that I did not say anything flippant-that is scary-but you make the point of should we be doing the early stage things that have the bigger impact or should we be doing the stuff we can do now that has a lower impact but less risk. We were very thoughtful about setting our strategy at the beginning of this. We have spent a long time looking at it to answer those questions, "Should we do big projects? Should we do small projects? Should we do the riskier one or should we not? Should we go for the biggest green impact and the highest risk or a lower acceptable green impact and a lower risk?" We mapped out all the places that we could invest in and we basically built a two-by-two matrix that looked at risk and looked at green impact, and where we wanted to focus was the areas that had the biggest green impact and the lowest risk.

Why the lowest risk? The renewable energy business has had a number of highs and lows. There was a tremendous push into new energy technology some five or six years ago. A lot of people raised venture capital money and, as happens in the venture capital business, they invested those in early stage risky technologies. Some of those were successes, but more than most were failures. To give you an example, the US Government supported a number of new technologies, some of which did not work, which failed to achieve commercial success, and the US Government lost a lot of money on those and it caused a huge furore. We wanted to stay absolutely away from that area, not be early stage technology pickers, which is pretty risky, but to focus on the areas where we could get the biggest green impact with the lower end of risk, which is how we ended up in the infrastructure. That is also what Brussels wanted us to focus on, so we were absolutely keen on those two bits.

I would not like to be sitting in front of this Committee, or any others, explaining to you that we have made 25 investments in early stage technology, that we expected 20 of those to fail and five of those to succeed. Of course, you get the 20 failures before you get the five successes. You know when something is dead butyou are never sure if it is going to be a success, and so for the first three or four years of our life we would be sitting here saying, "Yes, we lost money on that and, yes, we lost money on that and, yes, we lost money on that but we have three that we think could really be great, but we can’t prove it yet". So we want to focus on biggest green impact, lower end of the risk scale, investing in projects with proven technologies, proven management teams and then managing the risk.

To get back to your AD suggestion-I will choose that rather than the nuclear one-when we are looking at building AD, we will look for a contractual framework that will minimise our risk. We will look for proven operators, "Have you done this before? How many times have you done it? Show me the operating results of the three plants. What did you learn? What is different about what you are doing now?" We will try to get fixed price engineering, procurement and construction contracts so there can’t be any cost overruns. If there are, the guy who built it picks it up. We may decide that it is better to be in the debt rather than the equity. We may decide equity is okay, but we may decide the debt because if the thing doesn’t quite perform, the equity takes the bath, not the debt. Then we will want to see secure off-take agreements for the power. Maybe we need a 10-year power purchase agreement, and we will want to see supply contracts locked in place during the period of our debt.

So we fundamentally look at a project and we take apart the various different pieces of risk. We have a whole risk team who sit here in the Edinburgh office and that is all they do. They are not responsible for getting deals across the line, they are not responsible for finding things. They are responsible for pulling apart the various pieces of that and finding structural solutions that mitigate that risk.

Q125 Mr Spencer: So you are not going for the risk yourself, you are sticking with what is proven?

Shaun Kingsbury: Yes.

Q126 Mr Spencer: You have said to us that there are several projects that, because of their long-term nature, need that sort of pump-priming, or that support to make sure they stack up over a longer period of time. As the economy recovers and the banking sector recovers and the regular banking sector can look much longer term, you will become irrelevant because the commercial sector will be able to support all these things without mentioning green.

Shaun Kingsbury: I don’t think we will. It is a good point, but I don’t think we will because the market will deepen. More capital may come in, but there may be more projects that still need capital or they need it in a different place. Hopefully you are right-that people are willing to lend, they are willing to lend long. Maybe we will focus on the capital markets side there. Let me give you an example. In the US today, if you were funding a long-dated onshore wind farm you probably would not go to a project finance bank and ask them for a 12-year loan. You would go to the project bond market. That is the long-dated institutional investors who like those very steady, secure cash flows. That capital market does not exist today for projects in the UK, so what we may do is go and find a piece of that debt or buy into the debt of that project. We may credit enhance that project, so take a piece of it, maybe a first loss piece. We would then take the remaining piece, get it rated as a bond by the rating agencies and then take that out and try to establish a role for long-dated capital institutional investors to buy into that.

So we may not be doing the piece that we are doing today. We are always half a step ahead, so I do not think we would go away. I hope you are right, by the way. I hope there is more capital, I hope we see more projects and more capital flowing in. It just means that the piece of it that we need to provide will change. We will still do the innovative things, the green capital transactions, still try to get capital markets to work and provide different types of capital that aren’t available today. We are going to be around for a while.

Q127 Chair: I think it would be helpful, both to our witnesses and to the Committee, if I remind us that we need speed up a bit and I need to take responsibility for getting our witnesses to speed up a little bit. On the current questions we have, I know that Mr Maxwell wants to come in, Mr Aldous does and Dr Whitehead does as well, if that is okay. Do you want to come in now, Mr Maxwell, in relation to what Mr Kingsbury said?

Jonathan Maxwell: I was going to make a couple of quick points on technology.

Chair: Crisp points.

Jonathan Maxwell: First-and this was within the three sectors-I am pleased to say that the UK has a global-scale resource on the offshore wind side of the business, and for an energy economy that needs 85-ish GW of power, offshore wind can contribute very substantially to that. I think it is part of the focus areas that should be acknowledged that the Green Investment Bank is in the main highway there in terms of delivery of renewable power.

On the energy efficiency side, I am also pleased to say that established, commercially-proven technologies can be responsible, in my opinion, for at least 60% to 80% of the energy savings that we are going to be able to create in the UK. We have to take about 15 GW of power-wasted energy, I would call it-out of the economy here in the UK over the next five or 10 years and Ofgem has told us we are going to have a 3% capacity in the energy market in 2015 and that can be delivered through established commercially proven technologies, so I think deployment rather than risk-taking is key.

Q128 Mr Spencer: Crisply, Chairman. You are doing £3 privately for every £1 that you are currently investing?

Shaun Kingsbury: Correct.

Q129 Mr Spencer: The Government said you should be doing £5 to £1. Why are you under-performing and when will you get to £5 to £1?

Shaun Kingsbury: I am never sure where that £5 to £1 number came from; it is never a number we committed to. I think it is a number that somehow got out there. We have no idea where. We never committed to any number, by the way. We think £3 to £1, for example, 25% of the total capital, is a pretty good number. We have done slightly better this year. We are at £4 to £1.

Q130 Mr Spencer: So you would never get to £5 to £1?

Shaun Kingsbury: I don’t know if we can get to £5 to £1. The case that you mentioned earlier of more people coming into the market and requiring more capital and more projects going ahead may mean that we have to provide a smaller portion of that, so we may get there. I have never committed to a target. I have no idea where the £5 to £1 came from.

Q131 Peter Aldous: Very quickly, I can understand the strategy of pursuing those projects with the biggest green impact and lowest risk and avoid being an early technology picker. If you get a project that is more risky, that is one of those early technologies, do you have a dialogue with venture capitalists or other people who you might be able to refer that to on to?

Shaun Kingsbury: Yes, we do. We know lots of players in the market and if it is a technology that is a bit new, we can kind of invest in the technology. We see technologies, for example, in gasification coming to the UK, which could deal with both biomass and some portions of the waste stream that are new to the UK but they are operating at scale with multiple plants in places like North America. We would look at that type of technology. Again, it is the demonstration effect; it is a perfect thing for us to focus on. We have the technology skills to understand whether we think that is going to work, we will structure it very carefully to mitigate that risk, but if we can get one of those away, other people will finance them and it is a good thing we want to see in the UK.

Q132 Dr Whitehead: Very crisply, are you considering green bonds as a way of going into the next phase of capital rating?

Shaun Kingsbury: We are considering green bonds. There are several flavours of green bonds, if you like. Most of the green bonds that have been issued in the world today have been issued by folks like the IFC, where they say, "We are AAA. Here is a piece of debt. We are going to invest that capital in green stuff, so it is a green bond". We are focused on an asset-backed green bond, so we are talking to some of the existing providers of debt, people who have already lent money to performing and operating renewable energy projects around the UK about whether we could repackage those pieces, whether we could put them all together from a variety of different projects, create a green bond, but an asset-backed green bond with operating securities and take that to the market. We are in early-stage discussions with them. We have identified people who might be willing to sell those, but we would like to get those into the public market.

We have been successful in helping Greencoat Capital get away, that transaction I talked about with the £50 million from BIS. There are now Greencoat and a number of other folks who are out there providing a way to invest equity money into projects. We need similar vehicles for debt, green bonds effectively, and we are very much focused on trying to do that. Can we get it away? I don’t know the answer to that yet. Are we working on it? Yes.

Q133 Mark Lazarowicz: Back to this issue about investment strategy, clearly you want to invest in projects with the maximum green impact and a low risk and no doubt the best financial return as well. It is easy to say that, we all want to do it, but the issue is how you do that. Also, how would you more specifically do that, weighting different factors? For example, is it purely a monetisation of benefits? Do you simply value the green benefit impact or do you have some kind of threshold that projects must pass before making a decision? How do you go about it in practical terms, taking account of the green consequences?

Shaun Kingsbury: Tessa, why don’t you answer on the threshold we have for green?

Tessa Tennant: I think one thing that it is important the Committee is aware of is that, when the Bank was established, it was agreed very early on that, unlike quite a lot of financial institutions where there would be one main board director who had responsibility for green, a green committee and a whole green facility, because this is the Green Investment Bank that was not really acceptable as a model. Green in our case had to be integrated throughout the way the Bank operates. Therefore the interim green committee that I Chair, is there to establish the policies, sort out the reporting procedures and the environmental green impact evaluation processes, but also to ensure that green is written into the script of the risk and audit committee, the remuneration committee, the investment committee and so on so that the Bank as a whole has culturally got this mix on board. This is key and it is real leadership, I guarantee you, in terms of what institutions in the finance sector are doing in this area.

On the specific question of how projects are evaluated and how you weigh up the finance/green discourse, we have set out the green investment principles and policies and they are about to go public. I hope the board will be signing those off next week. Beyond that and as part of creating those, over the late spring/summer months, we organised a series of workshops to stress test our thresholds and the way we were thinking about how to evaluate each of our key sectors with key stakeholders and experts in the priority sectors. While we cannot please all the people all the time, we have a fairly high degree of comfort that we have robust policies in place now for how we go about evaluating projects.

That bit is done, and I think that what we did in our first green report was really great, given that the Bank had not even existed for a year, but there is more work to do on the reporting side. That is what you will see coming through over the next year. I hope it will answer a lot of the questions around how the projects get evaluated.

Q134 Mark Lazarowicz: This is a complex area and I appreciate time is limited, but those green criteria, are they primarily about CO2 emissions and so on? How do you take into account other sorts of environmental considerations?

Tessa Tennant: Absolutely. The mandate of the Bank is very clear around this, that it is carbon emissions, but also impact on the broader environment, impact on biodiversity, green economy implications. That is set into our DNA.

Shaun Kingsbury: Yes. We have five green purposes. I will give you them, and I always like to read them off so I don’t mix them. First, the reduction of greenhouse gases, and we report on that every year. The advancement of the use of natural resources-"Can we do things more efficiently?" is how I would describe what that means. We look at efficiency and the protection of the natural environment. Things like avoided landfill is a way of measuring that, where we are not putting things in the ground and they leach. Protection and enhancement of biodiversity. We are very conscious when we look at things like biomass to power that we are not clearing whole areas of trees somewhere else in the world so that we can feel good about being green here in the UK. We audit all the supply chains on those things. Then finally, the promotion of environmental sustainability, and that is everything from the video pods you saw when you walked around the office where we can communicate-we do not always have to travel up and down between Edinburgh-to the way that we kit out our offices, and we explained some of that at the beginning.

Q135 Mark Lazarowicz: On this question, you mentioned biomass was obviously a controversial area and the issues of debate about the Drax investment and so on. How did you go about applying those high principles in such a way that you concluded that the investment in Drax was environmentally sustainable? How did you do that?

Shaun Kingsbury: The first thing that I would say is that we do not set Government policy, and so there is a support mechanism in place to move coal off the system by doing coal to biomass conversions. Drax is the first to take advantage of that. We knew it was supported; it was part of the Government’s plan to move towards a greener economy, and it fell within our investment remit, which was approved by Brussels.

Q136 Mark Lazarowicz: So it was a Government agreement that you implemented?

Shaun Kingsbury: Correct, but that is not enough by itself. We spent a huge amount of time looking at the sustainability criteria that Drax have put in place and the sustainability criteria we had developed ourselves to ensure that the way they were planning to source their fuel would meet those. Subsequently, I should say that Government has published a set of sustainability criteria as well and that investment absolutely fits even within those newer, tighter criteria. We also sent a team out to North America to look at the supply chain, go and visit it, and that has focused on using existing forests that are managed as a crop, they are managed for the paper and pulp business or the plank business, for furniture and things like that, and using the offcuts from those, the smaller branches, all the other pieces that cannot be used for the major work to put through the chippers and the pulpers to come out with the pellets, which are then shipped here.

We went and helped set up the sustainability criteria. We wrote into our documentation that they needed to do that, so even if they are financially on track, but off track from a green perspective-if they don’t adhere to those sustainability criteria-we have the ability to pull our loan. We have real teeth in those arrangements and we will have those externally audited and reported to us every year. We did not just accept what they said. We went out and visited and made sure the criteria met our own and theirs. We have put in audit arrangements, and our arrangement with them has teeth.

Q137 Mark Lazarowicz: If I can briefly follow up this point. It is important that that external audit is not just financial auditing, it is auditing on environmental concerns. If you are provided with information that leads you to not just Drax, but any project that does not meet those criteria, you can then review presumably, at a certain point anyway, your investment in that firm?

Shaun Kingsbury: Correct, absolutely. That is a warranty in the equity investment or the debt investment we make, that they have to abide by that, and we will have it externally checked. There is assurance in place from an external person. Just like you would assure and audit the financials, we assure and audit the greens.

Q138 Mark Lazarowicz: We have had-and I am sure you have seen as well-papers submitted to us about the supply for biomass for Drax, suggesting that natural hardwood of the southern USA is being damaged, cut down, to supply not necessarily Drax, but the market generally in North America.

Shaun Kingsbury: Yes, I have seen that.

Mark Lazarowicz: It is not necessarily that you are doing it, but it is because of a higher demand for biomass generally. That is going to have an effect on forests, and there are no doubt different views on that, but how do you take account of that? What would you respond to that particular criticism or query, and how do you ensure that maybe changing information is taken into account in your decision-making process?

Shaun Kingsbury: Again, it comes back to the policy question; you are asking a policy question. Let me turn it around the other way. If Government was supporting a conversion of coal to biomass and we decided, "We are not going to do that. We have just decided we do not want to do that, that doesn’t feel right to us", no capital would be provided and we would be in conflict.

Q139 Mark Lazarowicz: So it is a Government decision really?

Shaun Kingsbury: It is a Government decision about what represents green. What we do is take that a step further. They set the bar, the minimum standard, if you like. We take that a step further by writing that into all the documentation, by having real teeth in those agreements and by ensuring that we follow up by auditing and tracking that, so that if, in the end, we found that any investment we made was not following the agreements we had in place around how it sourced its biomass, we have the ability to retrieve the loan, put them into default and get our money back.

Q140 Chair: Dr Offord is just going to follow on with the relationships with Government, but just for my clarity could you explain how Government goes about defining what is green and what is the actual mechanism for that? Presumably you are looking at what could be a definition from within and across different Government Departments?

Shaun Kingsbury: The major source of that and the major interaction we have is of course with the Department of Energy and Climate Change. They release, periodically, views on the sustainability of biomass. They have sustainability and what constitutes CHP, combined heat and power. They have views on all the key drivers, all those key metrics that we would have and set the level, for example, on the fees that you charge for putting stuff in landfill. So those are all the key drivers. We look to them predominantly and we take our lead from that, but we do not stop there. That is the key thing. That is the bit that I really want to reinforce. We go further. We give all our arrangements real teeth. We can claw that money back, we can cancel those loans and we push with each of the investment companies a need to perform better. We build in an improvement in their performance and we ask them to come back every year and suggest ideas for improving their greenhouse emissions, their carbon footprint. So we are taking it that step further.

Q141 Dr Offord: I will try to come in from that point. I think you made it very clear that you do not set Government policy, and you mentioned DECC earlier about CHP, biomass and sustainability, but the way that you are constitutionally instructed is that you operate independently from the Government?

Shaun Kingsbury: Correct.

Q142 Dr Offord: How does your relationship work with the Government, and what I mean by that is how do you communicate? The Secretary of State for Business, Innovation and Skills is your sole shareholder, so in some ways he is the boss, but I am sure you do not speak to him daily or weekly.

Shaun Kingsbury: Let me describe the governance arrangements for the Bank, which will address that. It was decided that the Bank should operate independently, being a kind of expert investor, much better that it gets on with deciding how to deploy and how to deliver on the strategy of the overall objectives, and so we established a board. We have an independent board and an independent chairman. Lord Smith of Kelvin is our Chairman, who is based up here in our Edinburgh office. The board has eight members. Tessa is one of them, but they come from a variety of backgrounds, from green investing through the finance world, through the energy world as well, all parts of the energy spectrum. We have a really interesting and helpful group of people who come together to provide direction and I report to the chairman through the board. We have one member of that board who sits on the Shareholder Executive, so represents BIS, if you like, but when it comes to the board meetings, as all directors, he acts in the best interests of the company. We have Quarterly Shareholder Meetings where we sit down and review where we are, a big presentation and go through all the financials, and every two months we have a board meeting, usually here in Edinburgh, where we sit down and go through with the board where we are.

When you are the chief executive of this company, it feels very much like the chief executive of any company. I have a board; I have the regular corporate governance. We are set up as a PLC, we are entirely transparent in those ways, and that is really how it works. So we run the business under the auspices and the governance of the board.

Q143 Dr Offord: Thank you. That is really helpful. One of the questions I would like to ask is about your interaction with other Government Departments. You mentioned that DECC specifies the sustainability of CHP plants and also biomass. Do you have any contact with other Government Departments, and particularly I am thinking of Defra?

Shaun Kingsbury: Yes, we do. We have spent some time talking to them about their aspirations for waste and recycling, because that is the area where we have most overlap with them. We are aware of where they like to be, where the UK is as a whole on a path towards reducing significantly the amount of material sent to landfill so that we can improve on our recycling rates and things like that. So we are very close to where they are, and on the waste and bioenergy thing we particularly spent a fair bit of time talking to them. We also talk to BIS, both as our shareholder and then just understanding that they take responsibility for looking at supply chain for offshore wind and things like that, and of course we talk to Treasury, which provides the capital, so that they understand where we are. We co-ordinate with Infrastructure UK. One of the earlier questions was about the debt guarantees they could provide-we co-ordinate with them.

Tessa Tennant: In the workshops I mentioned, we involved groups like the Committee on Climate Change, because they are key stakeholders in the Government’s development of policy.

Q144 Dr Offord: They very much, though, provide the policy in regard to the kind of technologies that are used and also you mentioned waste, for example, the amount of targets DECC set are based on that?

Shaun Kingsbury: Correct.

Dr Offord: Thank you. One other thing is that you obviously work with a lot of people who have a great deal of industry knowledge. During the course of your discussions about investments and putting together a deal, they may come to you with information about the problems that they are facing with some Government policies. What kind of mechanism is there for you to take that back to Government for the Government to refine their policy or to understand the problems and challenges faced by the industry?

Shaun Kingsbury: We have a Government relations and policy team. It is two people who work fulltime on these issues. We gather the information. We are very much engaged with DECC on the EMR process, as we understand the cost of capital. If we are in the middle of negotiations with people on offshore wind and-one of the questions that came up earlier-we have to be careful we do not take private information provided to us by counterparties who we are trying to work with on a deal provided under a non-disclosure agreement. That stuff stays within the Bank. That is protected and is subject to the non-disclosure agreement we have signed, which is standard commercial stuff. What we can do is give them a view, an aggregated view of where we think the market is. We can give them an aggregated view on the cost of capital. We can give them an aggregated view on the number of projects we see coming down and the strength of our pipeline. We can tell them about where new players are coming in.

Frequently, foreign direct investors who are looking at investment in offshore wind will come and talk to Treasury, DECC and the Green Investment Bank. Frequently, they will be shown around by UK Trade and Investment. We are also very close to them. We have attended a number of events where they have asked us to come out and speak to potential sources of foreign capital who have made it clear to them that they are interested in this sector, so we have made visits, where appropriate, to do that as well.

Q145 Dr Offord: Thank you. Finally, are there any specific areas, particularly policy areas or regulatory changes, that you would like to see the Government change that would particularly help you in your work so you could hopefully do more?

Shaun Kingsbury: Yes. I am going to give you a very obvious answer. I really want to see the EMR completed in a very successful way. It is a huge piece of re-regulation, designed to bring in the types of foreign direct investors and other sources of capital-it could be UK capital-that haven’t invested in this sector to bridge that very large gap. It is a very forward-thinking piece of legislation. We are supporting DECC in nailing it down and that is the thing I really want to see. Whenever you come to make an investment, it is very important that you see the strike prices or you see a piece of the contract or you understand how the market is going to work, but from a previous life of being a private equity investor in this space, you need to see all that come together, because if there is a piece missing, you cannot get to a final investment decision. It is all very interesting and it is all heading in the right direction, but I won’t write the cheque until I see it all in one place, so by Christmas I am very hopeful we are in a place where people can write cheques.

Q146 Dr Offord: Can I ask my final point, and I tread carefully for your sake. The Green Investment Bank was very much an initiative set up under the Coalition Agreement, so it could be perceived by some to be politically motivated. How have you maintained your independence from Government so that you are not perceived to be the Coalition’s Green Investment Bank, particularly in light of some of the investors that may become nervous about political interference?

Shaun Kingsbury: It is all back to the governance point. We really do operate as an independent, at arm’s length company. The Chairman and I are very strong around those issues. Tessa, you can speak about the board, but I have to say we have had tremendous support from all parts of the political divide. We have been out to see all the regional Governments as well and we have had tremendous political support and help from them. We are very fortunate in that we are off to a really good start. There is lots more work to do, so we are not declaring victory on that, and people have been tremendously supportive. But it is one of the things that of course concerned me when I considered taking such a role, "Is this going to be a political football?" and I have to say it absolutely has not been. We get no interference, but we do get tremendous support from all sides, and I just put this point on the record to thank everybody for it. It makes our job a lot easier.

Q147 Chair: I am going to bring in Mr Lazarowicz. Just before I do, you talked about the different relationships you have with Government Departments. What is your relationship with the Committee on Climate Change?

Shaun Kingsbury: A very good and open relationship. There are no formal governance relationships between the two. One of our board members, Professor Dame Julia King, is on the board of the Committee for Climate Change, and I previously knew and had a very good relationship with their CEO over there anyway, but we now have a common board member, so we have absolutely no reason for having any separation. We spend time talking to them about their aspirations and about their goals. They are one of the people we brought in when we were looking at our green investment criteria, for example, as part of this process of going out and getting feedback on it, so it is good. There are no governance relations, but we have at least one person in common and a very good open working relationship.

Q148 Chair: I will ask finally Mr Maxwell and Ms Tennant if there is anything you wish to add to the question that we have just had on Government relations?

Tessa Tennant: I would just add to what Shaun has said, that one thing that I am delighted by is that there have been communications reaching out at local government level-so LAPFF for example, the Local Authority Pension Funds Forum-to help them understand the problems that exist in the deployment of energy efficiency solutions and the opportunity to get local governments more engaged and understanding that the Bank is working very hard to develop products and packages that will help local governments to get energy efficiency happening more rapidly.

Q149 Chair: Is that particularly directed at the pension funds rather than at policy level?

Tessa Tennant: It is the two things. It is them as institutions, but it is also whether the pension funds should be aware of what the Bank is doing, because this is a very interesting investment area for funds too.

Jonathan Maxwell: In short, we have been maintaining a very open dialogue with DECC and I sit on the advisory board for the Energy Efficiency Deployment Office at DECC. That allows us to draw on and indeed feed back into DECC features of the energy efficiency marketplace and financing challenges. We also maintain an open dialogue with European institutions like the European Investment Bank and DG Energy for the same reasons, to understand policy implementation and also flow of capital.

Chair: We have now reached the end of our session and, because the honourable Member for Edinburgh North and Leith has put so much effort into making sure that the Green Investment Bank’s headquarters should be here in the city of Edinburgh, I am going to give the last word to Mr Lazarowicz.

Q150 Mark Lazarowicz: That is very kind, Chair, but it is a question that probably will get a very short answer. We are going to have a referendum on Scottish independence next year. I would not expect you for one minute to express a view on behalf of the Bank. I am sure you are well able to avoid, quite rightly, the answer to that question. But clearly if that was to lead to Scotland being a separate state, there would be an issue about what would happen to the Green Investment Bank thereafter. I presume we would have to either divide it in some way or it would become jointly managed. Have you had any suggestions or any thinking from the Scottish Government as to how they would see the Green Investment Bank developing or changing if Scotland were to vote for independence?

Shaun Kingsbury: Hopefully we are going to prove you right by ably avoiding questions on the devolution.

Q151 Mark Lazarowicz: It was a simple question. Have you had an approach?

Chair: We do need an answer.

Shaun Kingsbury: We are focusing on building up the Bank. We are not engaged in this political debate at all and therefore it is not something that we spend a lot of time on, around developing ideas or separation. It is not a focus for us.

Q152 Mark Lazarowicz: That is why my question was simply have you had an approach or suggestion from the Scottish Government?

Shaun Kingsbury: We have not had an approach or suggestion.

Chair: All right, at which stage I shall bring the proceedings to a close. Thank you to each of the witnesses and my colleagues, and I very much look forward to following your progress in the next few months and years. Thank you very much indeed for hosting us.

Shaun Kingsbury: Thank you for coming.

Prepared 5th March 2014