1. may 2013 [[1R]]
financing wind
ukinvestment
windpowermonthly.com
UKgovernmenttakes
stepstoreassureinvestors
The UK government’s efforts to encourage alternative forms of investment to utilities’ balance
sheets and bank debt are showing some earlysigns of success.But investors still have fears over
the uncertaintysurrounding the proposed newcontracts for difference.John McKenna reports
have to delay final investment decisions (FID) on their
projects until that time,when theywould knowwhat the
likely income earned on any investment would be.The
government’s answer has been to introduce these
“investment contracts”,which will be legally binding
contracts between the Department of Energy and Climate
Change (Decc) and developers that agree to pay the draft
strike prices,which are due to be set later this year.
“By helping developers make final investment
decisions this year,this process should allow
construction to start on a number of projects sooner
than otherwise would have been the case,” a Decc
spokesman said at the time of the announcement.
However,some question whether the contracts will
be enough to reassure developers and investors.“You
look at this enabling instrument,and there’s nothing in
it that answers the question about who’s going to buy
the power,” says Fintan Whelan,corporate finance
director at developer Mainstream Renewable Power.
No purchase obligation
Unlike under the RO system,there is no obligation for
utilities to buy power from renewable projects.While
most big offshore wind projects have some kind of
utility involvement so that this does not become an
issue,there are others,such as Mainstream’s own 4GW
Hornsea project off the Yorkshire coast,which it is
developing in a joint venture with Siemens,that do not
have the luxury of immediate access to a power buyer.
Pascale Vogel,a lawyer at Norton Rose specialising in
T
here has been a flurry of activity from the
UK government in the wind market recently,
focused on increasing investor confidence,
particularly in the offshore sector.First came
the announcement in mid-March that the
government would be offering “investment
contracts” to developers of renewables projects with
proposed generating capacities of 50MW or over.These
contracts have been introduced to counteract
uncertainty around the government’s electricity market
reform (EMR) which is being legislated through the
energy bill currently going through parliament.
A key part of the EMR will introduce a new support
system for renewables: known as contracts for difference
(CfD),this is a type of feed-in tariff (FIT) under which
generators will receive a top-up payment when the
wholesale electricity price is below a pre-agreed “strike
price” and pay money back when the price rises above it.
This mechanism will be introduced in 2014,although
generators will be able to choose between the current
renewables obligation (RO) system and CfD until 2017.
However,many developers,particularly those with
large offshore wind projects with long lead times,
complained to the government that without knowing
what the strike price would be until 2014,they would
Included Stakes in
Rhyl Flats (left) and
Little Cheyne Court
wind farms were part
of RWE’s deal with
Greencoat UK Wind
rweinnogy;simontunbridge

2. financing wind
ukinvestment
windpowermonthly.com
[[1L]] may 2013
Popular Banks were
keen to invest in
phases 2 and 3 of
C-Power’s Thornton
Bank project
made because government thought that Greencoat was
exactly the kind of mobilising of capital markets that it
is looking to encourage,” says Whelan.“The fund is an
instrument for recycling capital.I love the fact that
Greencoat has already invested in an offshore wind farm.
If you as developer have got funding [such as from a bank]
that wants to do construction,but not a 20-year loan,
then I would say let’s go and talk to the Greencoat guys.”
However,both the GIB and BIS investments are based
on the assumption that longer-term bank debt is not
available anymore for the project financing of wind
farms.This is a claim that can be relatively easily disputed
just by looking at the wind project financings that
closed in the UK in 2012,with the vast majority offered
loan terms of the construction period plus 15 years.
If there are any restrictions on lending for wind,it is
largely a local problem driven by the UK’s two state-
owned banks Lloyds and RBS,some experts say.
Bruce Valpy,director of renewable-energy
consultancy BVG Associates,points to the financing of
C-Power’s Thornton Bank offshore wind farm in
Belgium,which was financed in just nine months and
was oversubscribed with banks wanting to lend.The
problem is that European banks face exchange rate risk
with UK projects,which pushes their prices up,while
the UK banks’ interest rates are already high,he says.
Jerome Guillet,managing director of Green Giraffe
Energy Bankers,adds that the shortage of wind
financing deals coming through may mean that the UK
banks have to start cutting the cost and increasing the
length of their loans if they want to remain active in the
wind sector.“Japanese,German and French banks are
still able to provide long-term debt,” he says.
“UK banks like RBS and Lloyds,with more severe
restrictions on long term lending,are actually outliers,
and are being squeezed out of deals,even domestic ones.
Given that they are supposed to focus their investments
in the UK,they will need to increase maturities again in
order not be undercut by foreign banks.”
Government-owned RBS and Lloyds may well feel
pressure to crank up their UK lending,after the news in
March that UK banks’ earnings on international
investments have collapsed.Last year,the UK earned
£1.56 billion more on its investments abroad than
foreigners earned on their UK holdings,compared to a
2011 investment surplus of nearly £26 billion.Doing so
could benefit the wind sector,and make the GIB seem
slightly less vital than it does right now.
renewable-energy projects,agrees that this issue of
route to market with the CfD could still be a stumbling
block for projects looking to make their final
investment decisions before the energy bill is passed.
“The investment contract doesn’t solve the problem
[of route to market] for independent generators,but it is
something that is being worked on by Decc and the
industry,” she says.“They are looking at working on
standardising terms for power purchase agreements
(PPAs) and alternative structures for offtake.There is no
solution as yet,but it is an issue being considered.”
Far from perfect
Not only does the government’s attempt at removing
uncertainty fail to fully do so for independent
generators but,Vogel admits,even for those who do
decide to take up the contracts,investment decisions on
their projects will only be brought forward by six
months,due to the legal processes involved.
Investment contracts are conditional on the energy
bill being formally passed into law by Royal Assent and
state-aid clearance,she points out.
“Royal Assent is currently anticipated for December
2013.It will then take two to three months for state aid
approval,assuming there is no issue.CfDs are expected
to be signed at the earliest in August 2014,so the
investment contract will bring forward some
investments by at least six months or so.”
However,while the CfD investment contracts look as
though they will have minimal impact on the market,a
far more significant announcement for the future of
wind financing in the UK soon followed.In late March,
the UK government confirmed it was investing £108
million (€127 million) in offshore wind via both the
Department of Business,Innovation and Skills (BIS) and
its newly created Green Investment Bank (GIB).
Government investment
The GIB invested £57.5 million to take a 24.95% equity
stake in RWE’s Rhyl Flats offshore project.RWE also sold
a 24.95% stake to Greencoat UK Wind,a new fund
launched on the London Stock Exchange (LSE) with its
initial public offering (IPO) in March.The fund will buy
operational UK wind farms from utilities RWE and SSE.
It will take stakes in six onshore and offshore wind
farms comprising a net capacity of 126.5MW.In addition
to the Rhyll Flats stake,Greencoat’s will also be buying a
41% stake in RWE’s Little Cheyne Court wind farm,a
59.8MW project in Kent.Greencoat’s total investment in
the two UK projects is £107.7 million.
Greencoat’s IPO raised £260 million,and buyers of its
shares included BIS,which subscribed for 50 million
shares at a price of £1 per share,and SSE which took ten
million shares.
Whelan welcomes both the GIB’s investments and
the government’s backing of the Greencoat IPO —
which together represent an investment of £108 million
— as means of allowing cash-strapped utilities to free
up their balance sheets to build more projects.Indeed,
RWE confirmed it would be reinvesting the £162.5
million it earned from the Rhyl Flats and Little Cheyne
sales into other projects.
“The BIS investment in Greencoat,I suspect,was