What is the appetite of the banking sector for financing the green deal?
I think it will be a while before we see the first green deal financings go through, but we have already seen quite a bit of enthusiasm for the credit quality, the asset class and the whole proposal.
From a Deutsche Bank perspective, we are very interested. I think other banks that are active in renewable energy financing will also be watching this space - but there are probably only four or five major banks looking at it in depth right now. I am sure this will increase when the green deal gets going.
What do you need to hear from the government to make green deal become more attractive and viable?
I wouldn’t say there are concerns about attractiveness or viability at the moment - a lot of what we are hearing is very encouraging. What’s most important for us is fleshing out proposals and making them clear. What happens if people fail to pay? What happens when people move house? What kind of interest rate can be charged? These are the types of questions that are important. I wouldn’t class them as a concern or an issue, but we do need clarity.
Are you looking for the government to underwrite the credit risk around the green deal?
Not necessarily - there are a few options here that will work. If the government were to underwrite the credit risk, that would support lower borrowing costs, but in these austere times that may not be possible. If the risk of a potential loss falls on financiers, then that is also feasible, but mostly at an increased cost of financing.
Is turbulence in the financial markets likely to cause problems with the financing of the green deal?
A good question - and a complicated answer, I’m afraid. The main investors we would rely on to finance the green deal are investors who are sensitive to financial markets, so costs can fluctuate. August was a reminder of how quickly markets can move. On the other hand, the green deal will be considered high quality on the credit spectrum, so it will be much more robust than other investments in the bad times.
Who are the investors that are interested in green deal?
We see two main types of investors. First, we see dedicated clean energy funds - people who specialise in renewable energy, infrastructure and green investment. Second, we see bond market investors, who will tend to focus on the risk/return profile rather than the green side of things.
What are the opportunities for social landlords?
Social landlords have a great opportunity here. I know a lot of them are already energy efficient and it’s great that they want to make further improvements. A number are already familiar with the bond market so they could raise their finance themselves or they could issue green deal-specific bonds.
A major advantage landlords have is size. One of the issues the bond market will have to overcome is that it likes to finance £100 million to £150 million or more at a time. Private sector entities looking to enter this area won’t be able to guarantee that. Social landlords are able to guarantee they can raise a certain amount which is a big advantage.
Will the green deal be seen as a safe, workable investment?
Yes, definitely. Deutsche Bank has done a number of deals recently in Spain and Italy, particularly around solar energy. A lot of the basis of payback is government incentive schemes, just as it is for the green deal. And we have just done bond market deals in Spain and Portugal based on repayment through people’s bills - so bond markets are quite sophisticated. They are familiar with renewable energy, and to some extent, energy efficiency, and they are also familiar with repayment from charges out of fuel bills.
Do we need to see the Green Investment Bank used to get the cost of capital down?
I think if there were no Green Investment Bank it would still work, but GIB involvement could make financing less risky and therefore cheaper. I could imagine a role for the GIB in providing the risk capital for some of the finance, through equity, guarantees or first loss tranches [the most junior part of the capital structure which provides protection for the senior debt holders].
Conor Hennebry is director of global capital markets and treasury solutions at Deutsche Bank