The UK government has announced that it will provide guarantees for a £48.5m bond issuance to partially fund the £74m Speyside Biomass Power project, a combined heat and power plant developed by Estover Energy in Moray, Scotland. The remainder of the investment will be in the form of equity from the UK Green Investment Bank (£13m) and the asset manager John Laing (£13.5m). The bond has not yet been placed, as the marketing process only started yesterday, but it is planned to list on the London Stock Exchange.
The equity commitments are conditional on the bond issuance by Estover Energy. The exciting part is that the bond is guaranteed by Infrastructure UK, part of the Treasury, under a UK government £40bn guarantee scheme set up to help raise debt finance for certain infrastructure projects in energy, transport, communications, waste and housing. While to our knowledge the Speyside bond is not labelled as green, this bond provides an exciting example of Treasuries can efficiently boost green bond markets.
Of course, it would be preferable if policy support were not needed at all. However, kick-starting any new bond market requires government support to allow investors to become familiar with the opportunities, and developing a corporate green bonds market is no exception: although the recent green bonds market growth rates are undoubtedly impressive, the potential is much greater – even the $100bn we predict for green bonds issuance in 2015 is only a drop in the ocean of the vast $100 trillion (and growing) bond market. Policy support can help investors take full advantage of the potential the huge size of the bond market provides for green.
Loan guarantees as provided for Speyside are only one type of credit support that can make green bonds a better fit with the risk profile of institutional investors (and attract additional equity investment, as the loan guarantee for Speyside has done). Other options for governments to leverage bond markets to meet low-carbon and green development targets include:
- Policy and regulatory frameworks that reduce underlying project risks. This includes everything from green credit directives to long-term price signals e.g. Feed-in-tariffs.
- Employing public finance instruments and tools to provide the scale, liquidity and risk/return profile necessary for investors. These include: Government and development bank bond issuance (KfW has shown us how it’s done!); support for revenue bonds, covered bonds and green definitions. It also includes the use of tax incentives, guarantees (such as Speyside) and first-loss provisions. Lastly, there is potential for government to set green mandates for public funds e.g. sovereign wealth funds.
For a more detailed explanation of each policy lever, see our report from earlier this year on Growing Green Bonds in China.
You might be interested to know we are continuing our China policy work following the strong support and excitement we’ve seen from Chinese policy makers to support a green bonds market. There will be more blog posts on the topic after our next Beijing workshops early in September.
On the subject of policy, we’re also still working on developing policy options for green bonds for the European Commission, as part of a wider project on mobilising private finance for the low-carbon transition. More on that later this year.
To wrap-up, a quick comment on the green credentials of the Speyside project: Biomass projects are a generally tricky area, as the carbon savings depend on the nature of the biomass used. However, we are happy to see that the biomass used in the project will be by-products from the local forest industry, leading to an estimated 42,000 tonnes of CO2 equivalent saved per year.
Thumbs up to the UK government for showing how governments can support a green bonds market.
