Addressing Anaerobic Digestion financial issues

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Michael Dunn - Director, Iona Capital

Michael is a Director with Iona Capital, a private equity company that manages retail and institutional funds targeting the energy from waste sector and specifically seeks to invest in anaerobic digestion projects that require external funding. Iona Capital has recently completed a £6m investment, with Biogen Ltd as the operating partner, in an SPV co-owned with Biogen Ltd. He has held senior level positions with Shanks Group , Veolia Group and Amey Group. He currently holds a variety of sector-related non executive director roles including sitting on London Waste Ltd's board. He has a Masters in Finance degree from the London Business School.

This presentation was given on 27 September, 2012 at "Anaerobic Digestion: Accelerating the Rollout" event

Published in: Economy & Finance
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Addressing Anaerobic Digestion financial issues

  1. 1. Iona Capital LtdAddressing AD finance issues
  2. 2. Agenda• About Iona Capital• Market Overview• Principal Sources of Income• Project Specific Issues Structures - a funder’s perspective• Sources of Funding
  3. 3. About Iona Capital Ltd• The UK’s Environmental Renewables Investment Fund• Asset Managers with specialist funds targeting both the Local Authority and Merchant markets• Particular focus on AD infrastructure across UK• £16m committed to three Local Government AD projects• Financing target: non correlated returns to investors of 15-20% IRR’s
  4. 4. UK total waste volumes 350 Secondary, sewage and other 300Millions of tonnes Households 250 200 Commercial and 150 industrial 100 Mining and quarrying 50 0 Construction 2004 2006 2008 DEFRA, waste data
  5. 5. Electricity generation from Bioenergy (GWh) 14,000 Plant Biomass 12,000 Anaerobic digestion 10,000 Animal Biomass 8,000 Co-firing with fossil fuels 6,000 Biodegradable municipal solid waste combustion 4,000 Sewage sludge digestion 2,000 Landfill gas - 2007 2008 2009 2010 2011 Data source: DECC. Renewables Statistics
  6. 6. Principal sources of Income I AD Gate Fees 100 80 AD Gate Fees, £ 57 60 52 45 43 High 41 40 Low Median 20 0 2008 2009 2010 2011 2012 WRAP Gate Fees Reports 2008-2012
  7. 7. Principal sources of Income II Government incentives 25.0 20.0 Pence per kWh 15.0 10.0 5.0 0.0 2007 2008 2009 2010 2011 FITs (AD >5kWh) 9.9 9.9 LEC 0.4 0.5 0.5 0.5 0.5 ROC (Nominal)x1 4.9 5.3 5.4 5.2 5.1 Average consumer 5.4 6.8 7.3 6.5 6.9
  8. 8. Typical Project Assessment• Plant objectives: process number of tonnes, produce methane and electricity etc• Technical specification: waste type, site specific (planning etc)• Project considerations (timeframe, resources, skilled labour)• Cost considerations (designs, controls required, documents and safety training)• Income generation: realistic pricing of supply and off take, strength of counter party, contract durations and % secured of annual feedstock assumptions• Financial assumptions: capital, debt/equity split, (no) bank debt• Project level return (IRR 15% with upside to 20%)
  9. 9. Deal structure Waste contractor Utility Project Power Purchase agreement AgreementInvestor Debt Investor/Operator SPV Equity Construction Operating contract contract Construction Operating Contractor Contractor
  10. 10. Key Investment Risks Engineering, Procurement, Technology Supply Output Finance Construction• Site • Proven process • Waste Quality: • Electricity • Loan note:• Planning • Scalability composition & contracts, FITs, repayment and• Environmental • Due Diligence chemical content ROCs priority ranking permits • PAS 110 • Contamination • Heat contracts, • Equity: early• Performance levels RHI valuation • Plant maintenance Guarantees • Continuity • Digestate • Interest rate• Fixed Prices • Contracts/Terms: Disposal protection Local Authority vs • Biomethane • Security: C&I injection to grid debenture, land, • Rejects: % assets tonnage and • Parental hazardous waste Guarantees • Emissions: odour, • Indexation of noise, gases etc inflation rates
  11. 11. 1 MW AD plant Annual Operational Costs breakdown Total Construction Costs breakdown 1% 11% 3% 18% 5% 61% Facilities Management Civils 13%14% 59% 28% 22% 4% 11% 16% 10% 11% Waste Overheads Planning & Permitting Costs Life Cycle expenditure Management & Staff Utility Connections (incl. grid connections) Tank Bases, Underground Tank & Bund Area Rates & Utilities Equipment & Maintenance Other Site related costs AD related costs Site related costs Building Plant & Machinery
  12. 12. Gate Fees depend on project costs Life cycle, 5% Tax, 7% FM , 35% Assume £100 per tonne processing costs.Financing, 24% 25,000 tpa facility Capex, 16% Insurance, 6% Overheads, 5%
  13. 13. Economics of a typical Local Authority facility Small AD
  14. 14. Economics of a typical Local Authority facility Mid Range AD
  15. 15. Investment SensitivitiesValue change Base Case Electricity 20% RPI - 1% Increase in price increase in third party decrease by FM waste gate 20% fee by £10 to £40Project 14.29% 13.48% 12.08% 13.97% 14.71%post taxIRRBlended 13.90% 13.13% 13.90% 13.63% 14.32%returnInvestor 12.68% 12.19% 12.68% 12.51% 12.97%blendedreturn
  16. 16. Pecking order Theory Grants Local Government European organisations Charities Special Funds WRAP (AD Loan fund, £10 m) GIB (£3 billion) Internal Funding Universities – R&D Established operator Banks Proved operational HSBC, Barclays,Access the risk levels track record Returns Investec, Triodos Private Equity Iona, Albion, Novus Modus, Investec, Target IRRs! Debt/equity split Octopus, Foresight, Equitix
  17. 17. Summary – How to succeed with VC’s• Quality Business Plan addressing issues contained in these slides• Team – External and Internal• Financial Model but don’t get hung up on finance and tax – target your audience• Limited funding options in current market

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