COMMENT: The challenge of moving to a low-emissions economy is the single greatest economic opportunity in at least a generation, said Climate Change Minister James Shaw at the launch of the Government's $100 million green investment fund on Wednesday.
But seizing that opportunity necessitates intervention in the market if it is to happen in anything like the timeframe required.
"Every sector needs new technologies and new ways of doing things that deliver the same or better outcomes, for the same or better price but with a fraction of the emissions," he said.
The idea behind New Zealand Green Investment Finance Ltd (NZGIF), as it is to be known, is to bring together in one organisation expertise in both finance and emissions reduction technology, with the sole aim of increasing investment in low-emission projects.
It is designed to operate in that phase in a technology's life cycle which comes after innovation and initial R&D, but before it is sufficiently well established and familiar that ventures can fund themselves from the capital markets in the ordinary way.
It can be seen as part of an emerging trend for national governments, or US states, to establish "green investment banks" to accelerate the commercialisation of clean technology that the market has been too slow to do on its own, either because of information gaps or because their appetite for risk is too dainty.
It is not intended to be a passive fund, a pot of money which worthy climate-friendly projects can compete for. "It is not the Provincial Growth Fund and it is not an institutional investor like the New Zealand Superannuation Fund either," Shaw said.
Rather, it is intended to be a proactive originator of projects that meet four objectives:
• Every investment has to lower greenhouse gas emissions. The mile-wide "green" in its name should not raise false hopes. With only $100m of public money allocated to it, it has to focus on the mitigation of climate change.
• It has to deliver commercial returns, on a portfolio-wide basis. The sort of figure the Government has in mind is the Government bond yield plus 2 per cent.
So it is not intended to be a source of concessionary finance. Its Australian counterpart, the Clean Energy Finance Corp (CEFC), has so far achieved a return of 4.4 per cent on its core portfolio and has a medium- to longer-term target of 5.5 to 6.5 per cent.
• It is expected to "crowd in" private investment. So far the CEFC has attracted $1.80 of private money for every $1 it has invested. Britain's Green Investment Bank, in the five years before it was controversially privatised by sale (at a profit) to Macquarie Bank last year, had a leverage ratio of 3:1. The international peer group of green investment banks have leverage ratios in the 2 to 3 times range but that may rise if success breeds confidence.
• It is intended to have a market leadership or demonstration role. "New investment markets take time to develop and investors rely on good information to assess viability and risk." The fact that New Zealand's capital markets are comparatively shallow doesn't help either.
The NZGIF will have a flexible mandate in terms of what financial form its investments take.
In some cases, an equity stake would be appropriate; in others subordinated debt, especially if the need is for more patient capital than the normal providers of senior debt are comfortable with.
More innovative financing options might also emerge, like arranging for repayments to be made from savings achieved in energy bills, a model used by the British fund to accelerate local bodies' switch to LED street lighting.
The NZGIF is being established as an arm's length company under schedule 4A of the Public Finance Act, which means that it has shareholding ministers (Finance and Climate Change) but is to all other intents and purposes a normal company able to interact with the market as such.
Its mandate will be to focus on sectors where the greatest impact on emissions reductions can be made, Shaw said. "Potential opportunities include things like electric vehicles, manufacturing processes, energy efficient commercial buildings and low-emission farming practices."
A purely indicative example of the last one might be a biogas digester extracting energy from a dairy farm's stand-off pad and costing maybe $1m.
Green banks elsewhere often have a strong focus on renewable electricity generation.
That will not be the case for NZGIF, we are told, as New Zealand's electricity supply is already more than 80 per cent from renewable sources.
"However there may be opportunities to back smaller scale renewable energy projects where they are smart and can contribute to making our electricity supply more sustainable as demand for electricity rises."
The equivocation on this point illustrates a more general challenge for undertakings like the fund, which is how to ensure "additionality" — that is, that it is not pouring public money into investment that would have occurred anyway.
But we need not be too precious about that; dogmatic counterfactual assertions about what would have happened if what did happen hadn't happened are always a bit dodgy.
"One of the challenges for the board is to deploy the capital when it will make a difference rather than when a difference is already being made," Shaw said.
"One of the issues is time. Commercial building retrofits are a really good example. One of the reasons we don't have retrofits at a six star rating is that investment finance wants its return in three to five years. To get your return on a six star-rated building you need five to seven years."
The fund is intended to provide long-term but not perpetual investment. As it is repaid it can be recycled into further opportunities.
The Government has given the company no guidance as to the timeframe over which a commercial return is to be achieved. "We didn't want to tie their hands," Shaw said.