We need a Green Investment Bank, but not like this

It might just be a coincidence, but anyone fearing the departure of Chris Huhne from the Department of Energy and Climate Change (DECC) could result in a watering down of the coalition's green policy ambitions received their Exhibit A this morning, as the news emerged that the long-awaited Green Investment Bank will "play it safe" with its lending activities.

In an exclusive interview with The Times, Sir Adrian Montague, the financier tasked with overseeing the launch of the bank, insisted it will act in line with commercial lending principles, will not make risky investments in early-stage green technologies, will not offer preferential rates or other forms of support, will be tasked with delivering a dividend for the Treasury, and, finally, will emulate conventional development banks across Europe.

"We are not trying to give soft loans and grants," he told the paper. "We are not looking to give grants and support in areas where the private sector would not give support. We are looking at the technologies which need the leg-up to be commercial."

He added that the bank will follow "sound banking principles" that will ensure the "money is coming back" to the Treasury.

All of which sounds sensible enough, but it also begs the question as to why we need a Green Investment Bank with this remit at all? If the bank will only lend along commercial lines, should we not leave that lending to commercial banks? Are we not at risk of crowding out the likes of Triodos and the Co-operative, which already specialise in green financing – not to mention the countless clean-tech venture capitalists that make their money from identifying the "technologies which need the leg-up to be commercial"?

A spokeswoman for the Department for Business, Innovation and Skills (BIS) told me the bank will drive green investment through its "focus" on low-carbon projects and its ability to leverage further private sector investment. She also hinted that lending along commercial lines will be necessary if the bank is to comply with EU state aid rules.

Again, this sounds sensible enough. And yet, while it may seem churlish to complain about the government pumping £3bn of new investment into the sector, many green businesses will be justified in feeling the proposed bank has become such a pale imitation of its early ambitions that it is barely recognisable.

It may have secured a fair few victories elsewhere, but the green wing of the government has lost battle after battle over the structure of the Green Investment Bank. The Treasury blocked plans to let it raise additional finance from green bonds until 2015 at the earliest (and probably much later, given that it will not be able to borrow until the deficit is cleared) and control of the bank was handed to BIS, rather than DECC. Now, efforts to allow the kind of innovative lending and financing arrangements that would help de-risk green projects and drive private sector investment appear to have been strangled at birth in favour of commercial lending orthodoxy. Hopes that the bank could be used to offer more attractive financing to support the government's Green Deal scheme also look to have been pretty much extinguished.

The Green Investment Bank is bound to support plenty of admirable and effective green projects and will no doubt provide a significant boost to the UK's low-carbon economy. It is also to be hoped that Sir Adrian and the socially minded bankers he chooses to appoint can create a self-sustaining institution that may generate dividends for the cash-strapped Treasury.

But the scale of the ambition, compared to the original plans for the bank, is starting to look pretty woeful.

Imagine a Green Investment Bank that could offer Green Bonds to individuals and businesses, providing solid if unspectacular returns while allowing interested parties to play a proactive role in the UK's low-carbon economy. Yes, accounting rules may mean that it would end up adding to the deficit in the short term, but the boost in terms of jobs, tax receipts and low-carbon growth could be immense.

Imagine a Green Investment Bank that could take a punt on early-stage clean-tech projects currently unable to secure commercial financing. Yes, some money would be lost on failed projects, but such a move could also secure the UK's leadership in areas such as marine energy, carbon capture and storage, and offshore wind.

Imagine a Green Investment Bank that could offer government-backed insurance or loan guarantees to large-scale renewable energy projects that currently face high financing costs due to technology risks and policy uncertainty. Yes, the US government has its fingers burnt with such an approach when a guaranteed firm went bust, but countless other projects have prospered and the UK could easily repeat the approach for new offshore wind and biomass developments.

Imagine a Green Investment Bank that, like the Student Loan Company, could offer subsidised finance to the Green Deal scheme. Yes, the institution would no longer generate commercial rates of return, but it would suddenly make the Green Deal an attractive proposition capable of supporting a much larger array of energy efficiency and renewable energy technologies.

Any one of these four scenarios would deliver significant emissions reductions, job creation and economic growth, and yet all the current evidence suggests none of them will happen.  

The faint hope remains that Montague and the government are playing to the Brussels gallery, offering reassurance the bank will be entirely compliant with state aid rules, while investigating innovative lending approaches that meet EU regulations and provide support for projects and technologies that cannot secure commercial financing.

Failing that, the Green Investment Bank will provide a welcome addition to the ranks of banks already committed to investing in the low-carbon economy – and represent a massive missed opportunity that will make new energy and climate change secretary Ed Davey's  job considerably harder.